Abacus Property Group
Annual Report 2010

Plain-text annual report

annual financial report 2010 a b a c u s p r o p e r t y g r o u p a n n u a l fi n a n c a i l www.abacusproperty.com.au r e p o r t 2 0 1 0 ABACUS PROPERTY GROUP GLOSSARY At 30 June 2010, the Abacus Property Group (APG) comprised the Abacus Trust (AT), the Abacus Income Trust (AIT), Abacus Group Holdings Limited (AGHL) and Abacus Group Projects Limited (AGPL). A summary of the corporate structure is illustrated below. AGHL has been identified as the parent entity for the purpose of producing a consolidated financial report for the APG. That is, The concise financial report of AGHL services as a summary of the financial performance and position of APG as a whole. It consolidates the financial reports of AGHL, AT, AIT and AGPL and their controlled entities. Abacus Abacus Funds Management Limited, the responsible entity of the trusts AGHL Abacus Group Holdings Limited AGPL Abacus Group Projects Limited AIT APG AT Abacus Income Trust Abacus Property Group Abacus Trust ABACUS PROPERTY GROUP Level 34 Australia Square 264-278 George Street Sydney NSW 2000 T +61 2 9253 8600 F +61 2 9253 8616 E enquiries@abacusproperty.com.au www.abacusproperty.com.au Abacus Group Holdings Limited Abacus Trust Abacus Income Trust Abacus Group Projects Limited annual financial report abacus property group 30 June 2010 CONTENTS Directors’ Report Auditor’s Independence Declaration Consolidated Income Statement Consolidated Statement of Other Comprehensive Income Consolidated Distribution Statement Consolidated Statement of Financial Position Consolidated Statement of Changes in Equity Consolidated Statement of Cash Flow Notes to the Financial Statements Directors’ Declaration Independent Audit Report Corporate Governance Report ASX Additional Information 02 23 24 26 27 28 30 33 34 105 106 108 111 DIRECTORY Abacus Group Holdings Limited ABN: 31 080 604 619 Abacus Group Projects Limited ABN: 11 104 066 104 Abacus Funds Management Limited ABN: 66 007 415 590 Registered Office Level 34, Australia Square 264-278 George Street SYDNEY NSW 2000 Tel: (02) 9253 8600 Fax: (02) 9253 8616 Website: www.abacusproperty.com.au Directors of Responsible Entity and Abacus Group Holdings Limited John Thame, Chairman Frank Wolf, Managing Director William Bartlett David Bastian Dennis Bluth Malcolm Irving Len Lloyd Company Secretary Ellis Varejes Custodian Perpetual Trustee Company Limited Level 12, Angel Place 123 Pitt Street SYDNEY NSW 2000 Auditor Ernst & Young Ernst & Young Centre 680 George Street SYDNEY NSW 2000 Compliance Plan Auditor Ernst & Young Ernst & Young Centre 680 George Street SYDNEY NSW 2000 Share Registry Registries Limited Level 7, 207 Kent St SYDNEY NSW 2000 Tel: (02) 9290 9600 Fax: (02) 9279 0664 It is recommended that this Annual Financial Report should be read in conjunction with the Annual Financial Reports of Abacus Trust, Abacus Group Projects Limited and Abacus Income Trust as at 30 June 2010. It is also recommended that the report be considered together with any public announcements made by the Abacus Property Group in accordance with its continuous disclosure obligations arising under the Corporations Act 2001. 01 directors report 30 June 2010 The Directors present their report together with the consolidated financial report of Abacus Group Holdings Limited and the auditor’s report thereon. Abacus Group Holdings Limited has been identified as the parent entity of the group referred to as the Abacus Property Group (“APG” or the “Group”). The consolidated financial reports of the Abacus Property Group for the year ended 30 June 2010 comprises the consolidated financial reports of Abacus Group Holdings Limited (“AGHL”) and its controlled entities, Abacus Trust (“AT”) and its controlled entities, Abacus Group Projects Limited (“AGPL”) and its controlled entities and Abacus Income Trust (“AIT”) and its controlled entities. PRINCIPAL ACTIVITIES The Group operates predominantly in Australia and its principal activities during the course of the year ended 30 June 2010 included: • investment in commercial, retail and industrial properties; • property funds management; • property finance; and • participation in property joint ventures and developments. GROUP STRUCTURE The Group is comprised of AGHL, AT, AGPL and AIT. Shares in AGHL and AGPL and units in AT and AIT and have been stapled together so that none can be dealt with without the others. An APG security consists of one share in AGHL, one unit in AT, one share in AGPL and one unit in AIT. A transfer, issue or reorganisation of a share or unit in any of the component parts is accompanied by a transfer, issue or reorganisation of a share or unit in each of the other component parts. AGHL and AGPL are companies that are incorporated and domiciled in Australia. AT and AIT are Australian registered managed investment schemes. Abacus Funds Management Limited (“AFML”), the Responsible Entity of AT and AIT, is incorporated and domiciled in Australia and is a wholly-owned subsidiary of AGHL. 02 02 abacus property group REVIEW OF OPERATIONS The Group earned a net profit attributable to members of $25.4 million for the year ended 30 June 2010 (2009: $102.4 million loss).This profit has been calculated in accordance with Australian Accounting Standards and includes certain significant items that need adjustment to enable securityholders to obtain an understanding of the Group’s underlying profit of $64.9 million (2009: $72.0 million). The Underlying Profit reflects the statutory profit / (loss) as adjusted in order to present a figure which reflects the Directors’ assessment of the result for the ongoing business activities of the Group, in accordance with the AICD / Finsia principles for reporting Underlying Profit. Statutory net profit / (loss) attributable to securityholders Certain significant items: Net loss in fair value of investments held at balance date Net (gain) / loss in fair value of derivatives Net gain in fair value of investment properties and derivatives included in equity accounted profits from associates and joint ventures Debt forgiveness of loan as part of the restructuring of ADIFII 2010 $’000 2009 $’000 25,436 (102,412) 25,875 113,426 6,247 51,420 (619) (1,467) 4,900 11,000 Impairment of Intangibles 3,064 - Underlying profit 64,903 71,967 The improvement in the Group’s statutory performance reflects an easing in the effects of the global financial crisis. The net losses on revaluations (properties and investments) and interest rate swap valuations were $32.1 million as compared with $164.8 million in the previous year. The reduction in the Group’s underlying profit reflects lower transactional earnings – a consequence of the global financial crisis. Basic and diluted earnings / (loss) per security (cents) Basic and diluted underlying earnings per security (cents) Distributions per security (cents) (including proposed distribution) 2010 2009 1.53 (11.81) 3.90 8.30 3.15 7.75 The Group’s gearing was reduced further during the year to 22.2% (2009: 26.6%) following the placement to institutional securityholders in December 2009. The impact of both year-end fair value adjustments and the Group’s performance on its financial condition were as follows: Total Assets ($ million) Gearing (%) Net Assets ($ million) Net Tangible Assets ($ million) NTA per security ($) Retained earnings / (Accumulated losses) ($ million) Securities on issue (million) Weighted average securities on issue (million) 2010 2009 1,505.3 22.2 1,102.9 1,054.8 0.58 1,445.8 26.6 989.7 940.5 0.62 (23.3) (14.6) 1,813.6 1,509.6 1,662.5 867.5 Business activities which contributed to the Group’s operating performance and financial condition for the financial year were: 03 Property Finance Total property finance assets including accrued interest (and net of provisions) at 30 June 2010 were $87.6 million (2009: $146.2 million). Revenue earned from interest and fees (net of provisions) totalled $12.6 million for the year (2009 $14.4 million). Joint ventures & Developments Investments managed within the Joint Ventures & Developments division comprise direct and indirect property investments and at 30 June 2010 totalled $195.0 million (2009 $126.5 million). The joint venture investments are predominantly with experienced property investors and developers in New South Wales and Victoria. These joint ventures enable the Group to participate in a range of property- related opportunities with participants who have local knowledge and specialist property expertise. Joint Ventures including equity accounted income contributed $3.7 million to the Group result (2009: $19.7 million). directors report 30 June 2010 REVIEW OF OPERATIONS (CONTINUED) Property Total property assets at 30 June 2010 were $891 million (2009: $897 million) The property portfolio was independently revalued during the year ended 30 June 2010, on a staggered basis, which resulted in a net full year devaluation charge of $18.8 million (2009: $107.5 million). During the year the Group acquired 343 George Street, Sydney for $55 million plus acquisition costs and sold nine properties for $63.7 million which realised a profit of $2.1 million. Lower rental income of $71.2 million in the year was consistent with the reduction of the property portfolio. Funds Management Difficult market conditions continued to affect the distribution of unlisted retail investment products. Despite these conditions Funds Management contributed $13.7 million (2009: $13.2 million) to the Group result. In the second half of the 2010 financial year the Abacus Diversified Income Fund II was relaunched with an offering of 8% minimum income return over the life of the investment. The Abacus Storage Fund continued to trade solidly across its portfolio and the self-storage sector continues to be resilient in the current difficult environment. The Abacus Hospitality Fund has been adversely affected by the downturn in demand for hotel accommodation, particularly from international tourists and corporate business. During the year the Fund disposed of three hotels including the Swissotel in Sydney to reduce debt and improve bank LVR compliance. 04 04 abacus property group SIGNIFICANT CHANGES IN THE STATE OF AFFAIRS SIGNIFICANT EVENTS AFTER BALANCE DATE On 26 July 2010 the Group entered into a conditional agreement with the Kirsh Group to acquire Birkenhead Point Shopping Centre and Marina, Drummoyne, NSW (the Centre) for a total consideration of $174 million as equal tenants in common. Settlement is anticipated to occur in late 2010 with $45 million of the purchase price made available by the vendor as interest-free vendor finance for a period of 3 years. On 23 August 2010 the Group accepted an offer to purchase 343 George St for $78 million. Settlement is anticipated to occur in September 2010. On 26 August 2010 the Group re-financed its $480m CLUB facilities with a new 3 year $400 million syndicated bank debt facility (which replaced Abacus’ existing $400 million core facility maturing in February 2011) and a renewed 3 year $80 million working capital bank debt facility with ANZ (which also had a February 2011 maturity). During the year ended 30 June 2010, the contributed equity of the Group increased $123 million to $1,110.5 million compared to $987.5 million at 30 June 2009 due principally to the placement to institutional securityholders in December 2009. Total equity increased by 11.4% to $1,102.9 million at 30 June 2010 compared to $989.7 million at 30 June 2009. At 30 June 2010, existing bank loan facilities totalled approximately $625.9 million, of which $341.9 million was drawn.The weighted average maturity of its secured, non-recourse bank debt is 1.27 years. The Group manages interest rate exposure on debt facilities through the use of interest rate swap contracts. At 30 June 2010, 51.2% (2009: 76.3%) of total debt facilities were covered by interest rate swap arrangements at an weighted average interest rate (including bank margins and fees on both drawn and undrawn amounts) of 8% (2009: 7.31%) and a weighted average term to maturity of 6 years (2009: 4.69 years). DISTRIBUTIONS Group distributions in respect of the year ended 30 June 2010 were $52.8 million (2009: $58.6 million), which is equivalent to 3.15 cents per stapled security (2009: 7.75 cents). This distribution includes 1.65 cents ($29.5 million) that was paid on 11 August 2010. Further details on the distributions are set out in note 9 of the financial statements. 05 directors report 30 June 2010 LIKELY DEVELOPMENTS AND EXPECTED RESULTS The Group will continue to pursue strategies that seek to improve profitability and market share of its activities during the coming year. In the opinion of the Directors, disclosure of any further information on future developments and results than is already disclosed in this report or the financial statements would be unreasonably prejudicial to the interests of the Group. DIRECTORS AND SECRETARY The Directors of AGHL, AFML (the Responsible Entity of AT and AIT) and AGPL in office during the financial year and until the date of this report are as follows. Directors were in office for this entire period unless otherwise stated. John Thame Frank Wolf William Bartlett David Bastian Dennis Bluth Malcolm Irving Len Lloyd Chairman (Non-executive) Managing Director Director (Non-executive) Director (Non-executive) Director (Non-executive) Director (Non-executive) Executive Director 06 06 abacus property group DIRECTORS AND SECRETARY (CONTINUED) The qualifications, experience and special responsibilities of the Directors and Company Secretary are as follows: John Thame AIBF, FCPA Chairman (non-executive) Chairman of Due Diligence Committee Member of Audit Committee Member of Remuneration & Nomination Committee Mr Thame has over 30 years’ experience in the retail financial services industry in senior management positions. His 26-year career with Advance Bank included 10 years as Managing Director until the Bank’s merger with St George Bank Limited in 1997. Mr Thame was Chairman (2004 to 2008) and a director (1997 to 2008) of St George Bank Limited and St George Life Limited. He is also a director of Reckon Limited and The Village Building Co Limited (Group). Frank Wolf PhD, BA Hons Managing Director Dr Wolf has over 20 years’ experience in the property and financial services industries, including involvement in retail, commercial, industrial and hospitality-related assets in Australia, New Zealand and the United States. Dr Wolf has been instrumental in over $2 billion worth of property related transactions, corporate acquisitions and divestments and has financed specialist property-based assets in retirement and hospitality sectors. Dr Wolf is the Chairman of FSP Group Pty Limited and a Director of Kingston Capital Limited (financial planning groups). He is also a director of HGL Limited, a diversified publicly listed investment company. David Bastian CPA Non-executive Director Member of Due Diligence Committee Member of Remuneration & Nomination Committee Mr Bastian is a Non-Executive Director and has almost 40 years’ experience in the financial services industry. He was the Managing Director of the Group until September 2006, Managing Director of the Canberra Building Society for 20 years and an Executive Director of Godfrey Pembroke Financial Services Pty Limited for 7 years. Malcolm Irving AM FCPA, SF Fin, BCom, Hon DLitt Non-executive Director Chairman of Audit Committee Chairman of Compliance Committee Member of Remuneration & Nomination Committee Member of Due Diligence Committee Mr Irving is a Non-Executive Director and has many years’ experience in company management, including 12 years as Managing Director of CIBC Australia Limited. He was Chairman of Keycorp Limited (2001 to 2007) and Caltex Australia Limited and a director of Thales Australia Limited (2000 to 2010) and Telstra Corporation Limited. He is also a director of O’Connell Street Associates Pty Ltd. Dennis Bluth LLM, BA, FAPI Non-executive Director Member of Due Diligence Committee Mr Bluth is a Non-Executive Director and has practised as a solicitor for over 25 years, principally in the area of property law. Mr Bluth is a partner of HWL Ebsworth, Lawyers and is a member of a number of Law Society and Law Council Committees. He is also a member of the Australian Valuation & Professional Standards Board and part-time Judicial Member of the Administrative Decisions Tribunal, Retail Leases Division. 07 directors report 30 June 2010 DIRECTORS AND SECRETARY (CONTINUED) William J Bartlett FCA, CPA, FCMA, CA(SA) Non-executive Director Chairman of Remuneration & Nomination Committee Member of Audit Committee Member of Due Diligence Committee Mr Bartlett is a Non-Executive Director. During his 23 year career with Ernst & Young, he held the roles of Chairman of Worldwide Insurance Practice, National Director of Australian Financial Services Practice and Chairman of the Client Service Board. Mr Bartlett is a director of Suncorp-Metway Limited, GWA Limited, Reinsurance Group of America Inc and RGA Reinsurance Company of Australia Limited. Mr Bartlett was a director of Arana Therapeutics Limited (2004 to 2007). He is also a director of the Bradman Foundation and Museum. Len Lloyd FAPI, WDA Executive Director Mr Lloyd is a licensed Real Estate Agent and a registered Real Estate Valuer. He has 40 years experience in the development, management and funding of commercial, retail and residential property. Mr Lloyd joined the Abacus Group in October 2000 and now holds the position of Managing Director of Abacus Property Services Pty Limited responsible for property administration and development opportunities in the Abacus portfolio. In previous positions Mr Lloyd held responsibility for the property portfolios of the Advance Bank and St George Bank and provided valuation and lending advice while with the Commonwealth Development Bank for 21 years. Ellis Varejes BCom, LLB Company Secretary and Chief Operating Officer Mr Varejes has been the Company Secretary since September 2006. He has over 25 years’ experience as a corporate lawyer in private practice. As at the date of this report, the relevant interests of the directors in the stapled securities of Abacus Property Group were as follows: APG securities held 276,820 14,187,322 114,032 5,500,000 356,634 128,723 55,925 Directors John Thame Frank Wolf William Bartlett David Bastian Dennis Bluth Malcolm Irving Len Lloyd 08 08 abacus property group DIRECTORS AND SECRETARY (CONTINUED) Directors’ Meetings The number of meetings of directors (including meetings of committees of directors) of Abacus Group Holdings Limited and Abacus Funds Management Limited, the manager of the Abacus Property Group, held during the year and the number of meetings attended by each director were as follows: BOARD AUDIT & RISK COMMITTEE DUE DILIGENCE COMMITTEE NOMINATION & REMUNERATION COMMITTEE HELD ATTENDED HELD ATTENDED HELD ATTENDED HELD ATTENDED 18 18 18 18 18 18 18 17 15 14 16 13 16 16 4 4 4 4 4 4 5 5 5 5 5 3 5 5 3 2 4 4 4 4 4 4 4 4 J Thame F Wolf W Bartlett D Bastian D Bluth M Irving L Lloyd Indemnification and Insurance of Directors and Officers The Group has paid an insurance premium in respect of a contract insuring all directors, full time executive officers and secretary. The terms of this policy prohibit disclosure of the nature of the risks insured or the premium paid. ENVIRONMENTAL REGULATION AND PERFORMANCE The Group is subject to significant environmental regulation in respect of its property activities. Adequate systems are in place for the management of the Group’s environmental responsibilities and compliance with the various licence requirements and regulations. No material breaches of requirements or any environmental issues have been identified during the year. 09 directors report 30 June 2010 AUDITORS INDEPENDENCE DECLARATION REMUNERATION REPORT (AUDITED) We have obtained an independence declaration from our auditor, Ernst & Young, and such declaration is shown on page 23. NON-AUDIT SERVICES The following non-audit services were provided by the Group’s auditor, Ernst & Young. The Directors are satisfied that the provision of non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The nature and scope of each type of non-audit service provided means that auditor independence was not compromised. Ernst & Young received or are due to receive the following amounts for the provision of non-audit services: Other assurance and compliance services $37,000 $37,000 ROUNDING The amounts contained in this report and in the annual financial report have been rounded to the nearest $1,000 (where rounding is applicable) under the option available to the group under ASIC Class Order 98/100. The group is an entity to which the Class Order applies. This Remuneration Report outlines the director and executive remuneration arrangements of the company and the Group in accordance with the requirements of the Corporations Act 2001 and its Regulations. For the purposes of this report Key Management Personnel of the Group are defined as those persons having authority and responsibility for planning, directing and controlling the major activities of the parent company and the Group, directly or indirectly, including any director (whether executive or otherwise) of the parent company, and includes the executives in the parent and the Group receiving the highest remuneration. For the purposes of this report, the term ‘executive’ encompasses the Managing Director and other senior executives of the parent and the Group. Details of key management personnel (including the highest paid executives of the Company and the Group). i) Non-executive Directors J. Thame W. Bartlett D. Bastian D. Bluth M. Irving ii) Executive Directors F. Wolf L. Lloyd iii) Executives R. de Aboitiz T. Hardwick C. Laird Chairman Director Director Director Director Managing Director Executive Director Chief Financial Officer Director Funds Management Director Joint Ventures J. L’Estrange General Manager Property Finance P. Strain E Varejes Director Property Chief Operating Officer 10 10 abacus property group REMUNERATION REPORT (AUDITED) (CONTINUED) Board oversight of remuneration Remuneration & Nomination Committee The Remuneration & Nomination Committee of the Board of Directors is responsible for making recommendations to the Board on the remuneration arrangements for the non- executive directors and executives. The Committee assesses the appropriateness of the nature and amount of remuneration of non-executive directors and executives on a periodic basis by reference to relevant employment market conditions with the overall objective of ensuring maximum stakeholder benefit from the retention of a quality performing Board and executive team. The Committee engages external consultants who provide independent advice on the level and composition of director and executive remuneration. These consultants report to the Committee and the Board. The Committee and the Board are mindful of the Corporations and Markets Advisory Committee proposals regarding the composition of the Board. The Board is embarking on a process of consideration of its composition, particularly in light of the recommendations on diversity. Remuneration at a glance Base salaries Base salaries paid to executives did not increase in the year ended 30 June 2010 with the exception of the Director Property. The increase in Mr Strain’s base salary reflected changes in his responsibilities. Retention Bonus A retention bonus of $500,000 was paid to the Managing Director. The Remuneration and Nomination Committee considered it essential in 2008 to ensure his retention during a difficult economic period that the Group and the economy were experiencing. This bonus was payable if the Managing Director continued in that role until the 2009 Annual General Meeting. Bonuses Bonuses totalling $1,275,000 are payable to the executives of the Group for the year ended 30 June 2010. The details of these bonuses are set out in table 1. The amount of each bonus was determined by reference to the performance of the executive against the agreed key performance indicators, the performance of the Group and other aspects of the executive’s performance considered relevant in the context of the review. Remuneration strategy review At 30 June 2009 the long-term incentive plans were cancelled. These plans had been in operation since 2006 and from inception until the time of cancellation the executives had received no benefits from the operation of these plans. During the 2010 financial year the Remuneration and Nomination Committee worked with its external consultants, Deloitte Touche Tohmatsu, to complete a comprehensive review of remuneration arrangements in order to align them more closely with the Group’s growth objectives in the 2011 financial year and subsequent financial years.The result of this review was a number of changes to be put in place for 2011.These include changes to the operation of the short-term incentive plan and introduction of a new long-term incentive plan. 11 directors report 30 June 2010 REMUNERATION REPORT (AUDITED) (CONTINUED) Non-executive director remuneration Remuneration policy The performance of the Group depends upon the quality of its directors and executives. To prosper, the Group must attract, motivate and retain highly skilled directors and executives. The Group’s policy, which it believes is critical to achieving the Group’s overall objective of producing superior performance and growth, is competitive. The Group’s policy is designed to reward individual performance and closely align the interests of the executive directors and other executives to those of securityholders through the use of short-term and long-term incentives. To this end, the Group embodies the following principles in its remuneration framework: • provide competitive rewards to attract high calibre executives; • • • link executive rewards to the Group’s performance and the creations of securityholder value; have a reasonable portion of executive remuneration at risk; and establish performance hurdles for variable executive remuneration. Remuneration structure In accordance with corporate governance best practice, the separate structure of non-executive director and executive remuneration is as follows. Objective The Board seeks to set aggregate remuneration at a level that provides the Group with the ability to attract and retain directors of the highest calibre, while incurring a cost that is market competitive. Structure The Constitution and the ASX Listing Rules specify that the aggregate remuneration of non-executive directors must be determined from time to time by a general meeting. The last determination was at the annual general meeting held on 14 November 2007 when securityholders approved an aggregate remuneration limit of $600,000 per year. It is intended to seek an increase of $200,000 at the forthcoming Annual General Meeting. This amount represents a limit on non-executive directors’ total fees and does not represent the actual fees paid to non-executive directors which are set out in Table 1. As previously noted the Board is embarking on a process that will lead to changes in the Board’s composition. The aggregate remuneration limit and the fee structure is reviewed annually. When undertaking the annual review process the Board considers advice from its external consultants which includes a comparison of the fees paid to non-executive directors of similar groups. Fees payable, inclusive of superannuation, to non- executive directors are as follows: Board/Committee Board Board Audit & Risk Committee Audit & Risk Committee Compliance Committee Credit Committee Due Diligence Committee Remuneration & Nomination Committee Abacus Storage Funds Management Limited Board Role Fee Chairman $183,000 Member Chairman Member Chairman Member Member $69,000 $12,000 $6,000 $6,000 $5,760 $6,000 Member $6,000 Member $9,000 12 12 abacus property group REMUNERATION REPORT (AUDITED) (CONTINUED) The payment of additional fees for serving on a Board committee or on the Board of Abacus Storage Funds Management Limited recognises the additional time commitment required by directors who serve in those capacities. The non-executive directors do not receive retirement benefits. Nor do they participate in any incentive programs. The remuneration of non-executive directors for the years ended 30 June 2010 and 2009 is detailed in Table 1 of this report. Executive remuneration Objective The Group aims to reward executives with a level and mix of remuneration commensurate with their position and responsibilities within the Group so as to: • • • reward executives for Group, business unit and individual performance against targets set by reference to appropriate benchmarks; align the interests of executives with those of securityholders; and ensure total remuneration is competitive by market standards. Structure In determining the level and make-up of executive remuneration, the Remuneration & Nomination Committee engaged external consultants, Deloitte Touche Tohmatsu, to provide independent advice. The Board has negotiated a contract of employment with the Managing Director. Details of this contract are provided. Executive Remuneration consists of the following key elements: • • fixed remuneration (base salary, superannuation and non-monetary benefits). variable remuneration - short term incentive (STI); and - long term incentive (LTI). The proportion of fixed remuneration and variable remuneration (short term and long term incentives) for each executive is set out in Table 1. For the year ending 30 June 2011 the Board has determined that within the context of providing market competitive levels of remuneration to Abacus executives, it is appropriate that: (a) executives have a significant portion of their total remuneration at risk as it is tied to the performance of the business and their own contributions to that performance; and (b) executive remunerative be delivered with the proportion of fixed to potential maximum variable pay being in the ratio of 60:40 and a weighting based on seniority to a greater proportion of variable pay based on long-term performance to reflect their stewardship role. These arrangements will apply to those executives who are invited to participate in the Abacus incentive plan. Participation will be limited to executives whose roles have the potential to affect the long-term value of the Group. Market practice dictates that a significant portion of the remuneration of these executives should be linked to long-term incentives. Both short-term incentives (STIs) and long-term incentives (LTIs) will be offered to executives. STIs will comprise cash bonuses. LTIs will be synthetic equity (comparable to cash-settled options) that will generally have a vesting period of approximately three years. 13 directors report 30 June 2010 REMUNERATION REPORT (AUDITED) (CONTINUED) Variable Remuneration – Short Term Incentive (STI) Fixed Remuneration Objective Fixed remuneration is reviewed annually by the Remuneration & Nomination Committee. The process consists of a review of Group, business unit and individual performance, relevant comparative remuneration in the market and internally and, where appropriate, external advice on policies and practices. Base Salary Base salary is set by reference to the executive’s position, performance and experience. In order to attract and retain executives of the highest quality the Group aims to set competitive rates of base salary. Base salary levels are benchmarked periodically against the Group’s competitors and are reviewed on an annual basis having regard to performance, external market forces and promotion. As previously noted the base salary of all but one of the executives did not change during the year ended 30 June 2010. The fixed remuneration component of the Group’s executive directors and the most highly remunerated executives is detailed in Table 1. Objective The objective of the STI program is to link the achievement of the Group’s operational targets with the remuneration received by the executives charged with meeting those targets. Structure - Year ended 30 June 2010 Given the uncertainties during the 2010 financial year relating to the government’s proposals to change the legislative regime affecting executive remuneration, the Board decided to delay introducing a new comprehensive plan for variable remuneration until the new legislative regime was finalised. As a consequence variable remuneration for this year was limited to STIs. Payments made were delivered as a cash bonus. Bonus payments are closely linked to the performance of the executives and senior managers measured against key performance indicators which are set each year. The key performance indicators are designed to recognise and reward both financial and non-financial performance. The key performance indicators will vary according to the role of the particular executive and will relate to property, funds management, property finance, joint venture and corporate targets. The bonus awarded is determined by reference to the performance of the executive against the agreed key performance indicators, the performance of the Group and other aspects of the executive’s performance considered relevant in the context of the review. The aggregate of annual STI payments available for executives across the Group was approved by the Board. Managing Director’s remuneration In determining the Managing Director’s remuneration the Board considered market data from the general market (general listed industry companies of comparable size and, within that, A- REITs of comparable size) to determine what an appropriate market competitive level of pay is, his personal performance, his status in the industry and value to the Group and also his ability to attract funds to the Group and entities managed by the Group. 14 14 abacus property group abacus property group REMUNERATION REPORT (AUDITED) (CONTINUED) Variable Remuneration – Short Term Incentive (STI) (continued) Structure - Year ending 30 June 2011 After finalisation of the new legislative regime for executive remuneration, the committee reviewed the performance conditions that determine awards under the executive STI plan to ensure that it focuses executives on improving the underlying financial strength of the business. For the year ending 30 June 2011, awards under the STI plan will depend on improvement in underlying net profit at both Group and business unit level (for executives with business unit responsibility). Individual key performance indicators (KPIs) were reviewed to ensure that they strongly support contribution to underlying profitability in order to safeguard returns made to our securityholders. The committee worked with its external consultants to complete a comprehensive review of remuneration arrangements during the year in order to align them more closely with the Group’s growth objectives in the year ending 30 June 2011 and over the longer term.This review resulted in the Board adopting the following changes: • STI pool – from the year ending 30 June 2011 onwards the pool available for short-term incentive awards will be linked directly to achievement of underlying net profit target for the assessment year. • KPIs – the performance measures that determine individual awards under the short-term incentive plan were reviewed to ensure that they accurately represent the contributions to be made by executives to the Group’s financial and operating performance. Securityholders expect that companies consider the financial performance of the business when forming decisions about whether to pay bonus or not, and, if so, the size of bonuses. The Board has established a process to manage the assessment and payment of STI entitlements through KPIs and key effectiveness indicators. The process is set out as follows on the following page: 15 directors report 30 June 2010 REMUNERATION REPORT (AUDITED) (CONTINUED) Variable Remuneration – Short Term Incentive (STI) (continued) Beginning of the year Set the Plan parameters • Underlying net profit* target for coming year • KPIs for each participant • Maximum STIs payable for each participant • Determine maximum STI pool size based on sum of individual theoretical maximums Year-end Measure Group financial performance • • • Is underlying net profit target met or exceeded? If no, bonuses will generally not be available If yes, gateway is passed After year-end Distribute bonus • Assess individual performance against KPIs • STIs paid in cash *The Board has compared Abacus’ performance against several financial performance measures over annual periods to determine the strength of the relationship between the measures and securityholder value creation (measured by total securityholder return) and hence the most appropriate measure to determine entitlements to STIs. Based on this analysis the Board has adopted underlying net profit as the measure. Underlying net profit reflects the statutory profit as adjusted in order to present a figure which reflects the Directors’ assessment of the result for the ongoing business activities of the Group, in accordance with the AICD/Finsia principles for reporting underlying profit. For each relevant year the Board will specify an underlying net profit target that: • operates as a gateway that must be passed if bonuses are to be generally payable; and • The Board will retain a discretion based on its view of the circumstances at the time, to adjust the pool size. If the underlying net profit target has been missed by a small amount, the Board may reduce but not eliminate the pool if it determines the circumstances warrant such action. If performance has been exceptionally strong the Board may increase the total pool size to provide additional bonuses reflecting above target performance. Where the financial gateway has not been achieved and the Board determines that no bonus pool will generally be available, it retains the discretion to pay bonuses to selected individuals to reward them for their above target performance. 1616 abacus property group abacus property group REMUNERATION REPORT (AUDITED) (CONTINUED) Variable Remuneration – Short Term Incentive (STI) (continued) Structure - Year ending 30 June 2011 If an executive is no longer employed at the time when the Group pays STIs for any relevant year then that executive will generally not be entitled to be paid their STI bonus if the relevant executive resigned for any reason or if their employment was terminated with cause. Key Performance Indicators Where STIs are to be paid it is necessary to determine how STI entitlements will be quantified for participating executives. The KPIs incorporate qualitative indicators of effectiveness, performance and behaviour. They are the primary tools the Board will use as a means of determining performance against expectations in order to distribute STIs where the financial performance gateway specified by the Board has been achieved. The Board is mindful of the competing needs for Abacus to: • maintain a robust framework by which performance expectations are set and measured; and • retain its flexibility and entrepreneurialism as an organisation. The Board retains the ability to consider each executive’s total contribution to the Group. Variable Remuneration – Long Term Incentive (LTI) At 30 June 2009 the LTI plans were cancelled. These plans had been in operation since 2006 and at the time of cancellation the executives had received no benefits from the operation of these plans. No LTI awards were made during the year ended 30 June 2010. The Committee worked with its external consultants to develop a new LTI plan – from 1 July 2010 onwards, selected Abacus executives will be invited by the Board to participate in the new LTI plan which will reward improved Group performance and returns to securityholders. Awards under the plan will be linked directly to the Abacus security price and executives will not benefit under the plan unless the security price improves over the relevant vesting period. Objective The objective of the LTI plan is to reward executives in a manner that aligns remuneration with the creation of securityholder wealth. LTI grants will be made only to executives who are able to influence the generation of securityholder wealth and thus have an impact on the Group’s performance. LTI Security Appreciation Rights Plan The plan that operates from 1 July 2010 has been designed to align the interests of executives with those of security-holders by providing for a significant portion of the pay of participating executives to be linked to the long-term price performance of Abacus securities. 17 directors report 30 June 2010 REMUNERATION REPORT (AUDITED) (CONTINUED) Variable Remuneration – Long Term Incentive (LTI) (continued) Security Appreciation Rights Plan The security appreciation rights (SARs) plan is an LTI plan under which: • Eligibility to participate will be based on the performance assessment completed in determining STI awards. • Key executives may be allocated a number of SARs in any year as part of their annual remuneration package. The number of SARs allocated will be determined by reference to: - the target LTI portion of each participant’s annual remuneration package; and - an adjustment factor (up or down) based on the annual STI performance assessment for the prior year and other relevant factors taken into account by the Board in its discretion. • Each SAR is equivalent to the positive change in market value of one Abacus security over the vesting period. • • SARs vest at the end of a three-year period provided the executive remains employed by the Group (or otherwise at the Board’s discretion). The Board will calculate the difference between the 5-day volume weighted average price (VWAP) of Abacus securities on the last day of the vesting period (generally 30 June in the vesting year) less the 5-day VWAP of Abacus securities as at the day before the commencement of the vesting period (generally 1 July of the grant year). If the difference is positive, then the difference will be multiplied by the number of SARs allocated to the relevant executive that have vested. An amount equal to the product will be paid to the relevant executive. • Payment entitlements will be subject to PAYG tax withholding and will be made as soon as practicable following the completion of the vesting period. 1818 The Board will retain the discretion to allocate SARs in excess of the target LTI amount in cases of exceptional performance. The plan exposes executives to fluctuations in the security price throughout the vesting period and directly rewards them for successfully increasing Abacus’s security price over that period. If Abacus’s security price does not increase over the vesting period, executives will not be entitled to any payment under the plan. The security price was chosen as the key measure for the LTI on the basis that it: • • reflects the market’s assessment of the success or failure of Abacus management over the long-term; and incorporates the impact of all aspects of Abacus’s financial performance. SAR payouts are cash bonuses the size of which is determined by reference to the security price. Each SAR payout will be subject to: • income tax at the recipient’s marginal income tax rate in the year in which the bonus is paid; and • PAYG in the same manner as other cash payments. Link between remuneration policy and the Group’s performance The Group’s performance is regularly compared with its peers within the S&P/ASX 300 A-REIT. This peer group reflects the Group’s competitors for capital transactions and talent. For the year ended 30 June 2010, due to the continuing uncertainty in the market the Group’s internal financial and business KPI’s were considered to be a more appropriate measure for determining remuneration. abacus property group REMUNERATION REPORT (AUDITED) (CONTINUED) The Group’s performance in comparison with the S&P/ASX 300 A-REIT is set out in the following graph: APG and S&P/ASX 300 A-REIT - Accumulation Index Total Return 160% 120% 80% 40% 0% -40% ABP S&P/ASX 300 Accumulation 2004 2006 end of financial year 2008 2010 The Group’s performance for the past five years is as follows: Underlying/normalised earnings per security (cents) Distributions paid and proposed (cents) Closing security price Net tangible assets per security Weighted average securities on issue Employment contracts 2006 12.92 11.80 $1.57 $1.22 418.1m 2007 14.43 12.50 $1.98 $1.32 553.2m 2008 13.98 13.50 $1.15 $1.37 650.9m 2009 8.30 7.75 $0.37 $0.62 867.5m 2010 3.90 3.15 $0.41 $0.58 1,662.5m Managing Director The Managing Director, Dr Wolf, is employed under a rolling contract. The current employment contract commenced on 10 October 2002. Under the terms of the present contract: • Dr Wolf receives a base salary which is reviewed annually; • he is entitled to participate in the LTI plans that are made available and to receive STI payments; • Dr Wolf may resign from his position and thus terminate this contract by giving 6 months written notice; and • the Group may terminate this employment agreement by providing 12 months written notice or providing payment in lieu of notice (based on the fixed component of Dr Wolf’s remuneration). Other Executives There are no formal service agreements with other executives. The Group may terminate an executive’s service at any time without notice if serious misconduct has occurred. Where termination with cause occurs the executive is only entitled to remuneration up to the date of termination. 19 directors report 30 June 2010 TABLE 1: REMUNERATION OF KEY MANAGEMENT PERSONNEL SHORT-TERM BENEFITS SALARY & FEES CASH BONUS NON- MONETARY BENEFITS POST EMPLOYMENT SUPER- ANNUATION LONG- TERM BENEFITS LONG SERVICE LEAVE SECURITY- BASED PAYMENT OPTIONS TOTAL % PER- FORMANCE RELATED 177,890 79,817 53,762 34,000 108,000 453,469 - - - - - - - - - - - - 14,461 7,183 36,238 50,000 - 107,882 - - - - - - - - - - - - 192,351 87,000 90,000 84,000 108,000 561,351 - - - - - - 1,150,000 1,000,000 4,279 50,000 19,660 - 2,223,939 45% 300,000 150,000 - 50,000 5,513 - 505,513 30% 455,539 125,000 455,539 - 385,539 125,000 - - - 14,461 14,461 14,461 - - - - - - 595,000 21% 470,000 - 525,000 24% 397,539 75,000 4,279 32,461 7,056 - 516,335 15% 385,539 150,000 4,279 14,461 12,279 442,000 150,000 4,279 28,000 - - - 566,558 624,279 26% 24% 3,971,695 1,775,000 17,116 218,305 44,508 - 6,026,624 2010 Non-executive directors J Thame - Chairman W Bartlett D Bastian D Bluth M Irving Sub-total non-executive directors Executive Directors F Wolf - Managing Director L Lloyd - Managing Director, Property Services Other key management personnel R de Aboitiz - Chief Financial Officer T Hardwick - Director Funds Management C Laird - Director Joint Ventures* J L’Estrange - General Manager Property Finance P Strain - Director Property E Varejes - Chief Operating Officer Sub-total executive KMP 17,116 Total *C Laird did not meet the definition of a key management person under AASB 124 for the 2009 financial year but is a key management person for 2010. - 6,587,975 1,775,000 4,425,164 326,187 44,508 20 20 abacus property group TABLE 1: REMUNERATION OF KEY MANAGEMENT PERSONNEL SHORT-TERM BENEFITS SALARY & FEES CASH BONUS NON- MONETARY BENEFITS POST EMPLOYMENT SUPER- ANNUATION LONG- TERM BENEFITS LONG SERVICE LEAVE SECURITY- BASED PAYMENT OPTIONS# TOTAL % PER- FORMANCE RELATED 177,904 75,229 - - 98,000 351,133 - - - - - - - - - - - - 13,745 6,953 97,400 91,400 - 209,498 - - - - - - - - - - - - 191,649 82,182 97,400 91,400 98,000 560,631 2009 Non-executive directors J Thame - Chairman W Bartlett D Bastian D Bluth M Irving Sub-total non-executive directors 2,192,135 504,181 - - - 7,066 18,417 147,115 100,000 473,718 100,000 456,255 500,000 250,000 1,100,000 Executive Directors F Wolf - Managing Director L Lloyd - Managing Director, Property Services Other key management personnel R de Aboitiz - Chief Financial Officer T Hardwick - Director Funds Management J L’Estrange - General Manager Property Finance P Strain - Director Property E Varejes - Chief Operating Officer Sub-total executive KMP Total #These payments relate to options issued in prior periods. The options were cancelled on 30 June 2009 with the termination of the Executive Performance Award Plan. 1,289,742 1,289,742 3,357,015 3,708,148 382,985 592,483 500,000 500,000 44,165 44,165 398,255 396,250 456,255 300,000 130,449 147,115 147,115 147,115 97,115 13,745 50,000 31,745 73,750 13,745 9,363 9,319 - - - - - - - - - - - - - - - 567,115 617,115 586,478 489,768 617,115 5,573,907 6,134,538 - - - - - - 44% 29% 17% 24% 25% 27% 24% 21 directors report 30 June 2010 Signed in accordance with a resolution of the directors. John Thame Chairman Sydney, 27 August 2010 Frank Wolf Managing Director 22 abacus property group 23 consolidated income statement Year ended 30 June 2010 NOTES CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 REVENUE Rental income Finance income Funds management income Net change in fair value of investment properties derecognised Net change in fair value of investments and financial instruments derecognised Share of profit from equity accounted investments Income from distributions Total Revenue and Other Income Property expenses & outgoings Depreciation, amortisation and impairment expense Net change in fair value of derivatives Net change in fair value of investment properties held at balance date Net change in fair value of investments held at balance date Finance costs Administrative and other expenses PROFIT / (LOSS) BEFORE TAX Income tax benefit / (expense) PROFIT / (LOSS) AFTER TAX 6a 6b 6c 17b 7a 7b 7c 7d 7e 8a 71,238 78,927 558 484 17,940 18,243 2,338 1,049 20,175 20,065 2,116 1,784 - - 715 - 5,174 9,110 1,549 4,824 6,463 1,784 8,801 197 9,107 1,512 13,040 30,652 124,890 138,442 17,682 46,831 (11,677) (11,406) (324) (177) (4,728) (1,994) - - (6,247) (51,420) (826) (3,447) (18,775) (107,518) - (2,954) (7,100) (5,908) (883) (5,851) (29,722) (44,864) (493) (6,969) (20,982) (19,500) (1,083) 683 25,659 (666) 24,993 (104,168) 1,178 (102,990) 14,073 (1,471) 12,602 28,116 866 28,982 24 24 PROFIT / (LOSS) AFTER TAX NOTES CONSOLIDATED 2010 $’000 24,993 2009 $’000 (102,990) 2010 $’000 12,602 PARENT 2009 $’000 28,982 less: net (profit) / loss attributable to non-controlling interests AT members AGPL members AIT members External NET PROFIT/(LOSS) ATTRIBUTABLE TO MEMBERS OF AGHL (28,424) 105,975 8,596 (5,556) 443 3,161 1,829 578 - - - - - - - - 52 8,553 12,602 28,982 Net profit / (loss) attributable to members of the Group analysed by amounts attributable to: AGHL members AT members AGPL members AIT members NET PROFIT / (LOSS) AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE GROUP Basic and diluted earnings / (loss) per stapled security (cents) Basic and diluted earnings / (loss) per parent share (cents) 10 10 52 8,553 12,602 28,982 28,424 (105,975) (8,596) (3,161) 5,556 (1,829) - - - - - - 25,436 (102,412) 12,602 28,982 1.53 (11.81) 0.76 3.34 25 consolidated statement of other comprehensive income Year ended 30 June 2010 NET PROFIT / (LOSS) AFTER TAX OTHER COMPREHENSIVE INCOME Revaluation of assets, net of tax Foreign exchange translation adjustments, net of tax TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD Total comprehensive income / (loss) attributable to: Members of the APG Group External non-controlling interest TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD CONSOLIDATED 2010 $’000 24,993 2009 $’000 (102,990) 2010 $’000 12,602 PARENT 2009 $’000 28,982 (706) 53 24,340 1,048 (469) (102,411) - - 12,602 - - 28,982 24,783 (443) 24,340 (101,833) (578) (102,411) - - 12,602 CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 - - 28,982 PARENT 2009 $’000 Total comprehensive income / (loss) attributable to members of the Group analysed by amounts attributable to: AGHL members AT members AGPL members AIT members TOTAL COMPREHENSIVE INCOME / (LOSS) AFTER TAX ATTRIBUTABLE TO MEMBERS OF THE GROUP (916) 28,424 (8,281) 5,556 8,922 (105,975) (2,951) (1,829) 12,602 - - - 28,982 - - - 24,783 (101,833) 12,602 28,982 2626 consolidated statement of distribution Year ended 30 June 2010 NOTES CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 STATEMENT OF DISTRIBUTION Net profit / (loss) attributable to stapled security holders Transfer from / (to) retained earnings Distributions paid and payable Distribution per stapled security (cents per security) Weighted average number of securities (‘000) 25,436 (102,412) 12,602 28,982 8,615 34,051 2.25 1,662,482 149,666 47,254 7.00 867,488 (12,602) - - - (28,982) - - - 9 9 10 27 consolidated statement of financial position 30 June 2010 CURRENT ASSETS Cash and cash equivalents Trade and other receivables Property, plant and equipment held for sale Inventory Investment properties held for sale Property loans Other financial assets Other TOTAL CURRENT ASSETS NON-CURRENT ASSETS Property, plant and equipment Inventory Investment properties Property loans Other financial assets Equity accounted investments Deferred tax assets Intangible assets and goodwill Other TOTAL NON-CURRENT ASSETS NOTES CONSOLIDATED 2010 $’000 2009 $’000 11 12 14 15a 16 13a 13b 14 15b 16 13c 13d 17 8c 18 21,792 8,842 20,901 60,176 91,327 87,011 2,189 1,949 294,187 9,124 22,093 - 5,264 44,289 99,957 6,187 1,391 188,305 9,249 30,891 617,735 325,199 47,057 127,710 13,186 35,173 4,914 1,211,114 32,276 - 708,550 303,342 34,054 127,469 11,329 38,225 2,243 1,257,488 2010 $’000 996 1,342 - - - 9,902 2,189 288 14,717 - - 6,400 34,251 143,519 - 6,394 32,394 14 222,972 PARENT 2009 $’000 275 6,889 - - - 10,851 6,082 104 24,201 - - 6,450 31,483 113,678 - 4,283 32,394 - 188,288 TOTAL ASSETS 1,505,301 1,445,793 237,689 212,489 CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Other TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Trade and other payables Interest-bearing loans and borrowings Derivatives at fair value Deferred tax liabilities Other TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS TOTAL EQUITY 2828 19b 20a 19b 20b 21 8c 13,001 240,706 2,693 13,272 61,829 2,832 395 2,297 - 466 601 - 256,400 77,933 2,692 1,067 4,065 110,435 30,320 284 928 146,032 402,432 1,102,869 1,102,869 6,676 329,555 40,035 355 1,512 378,133 456,066 989,727 989,727 - 1,299 4,125 - 142,978 148,402 151,094 86,595 86,595 - 2,637 3,313 - 134,702 140,652 141,719 70,770 70,770 Equity attributable to members of AGHL: Contributed equity Reserves Retained earnings Total equity attributable to members of AGHL Equity attributable to members of AT: Contributed equity Retained earnings / (accumulated losses) Total equity attributable to members of AT Equity attributable to members of AGPL: Contributed equity Reserves Retained earnings / (accumulated losses) Total equity attributable to members of AGPL Equity attributable to members of AIT: Contributed equity Retained earnings Total equity attributable to members of AIT Equity attributable to external non-controlling interest: Contributed equity Retained earnings / (accumulated losses) Total equity attributable to external non- controlling interest TOTAL EQUITY EQUITY Contributed equity Reserves Retained earnings / (accumulated losses) Total stapled security holders’ interest in equity Total external non-controlling interest TOTAL EQUITY NOTES 2010 $’000 51,963 1,900 13,186 67,049 837,064 (58,057) 779,007 9,459 (85) (11,740) (2,366) 212,031 33,349 245,380 CONSOLIDATED 2009 $’000 45,734 2,868 13,020 61,622 745,141 (53,713) 691,428 8,392 (400) (3,144) 4,848 188,230 29,190 217,420 13,437 362 14,493 (84) 13,799 14,409 2010 $’000 53,009 5,448 28,138 86,595 PARENT 2009 $’000 47,064 5,448 18,258 70,770 - - - - - - - - - - - - - - - - - - - - - - - - 1,102,869 989,727 86,595 70,770 23 1,110,517 1,815 (23,262) 1,089,070 13,799 1,102,869 987,497 2,468 (14,647) 975,318 14,409 989,727 53,009 5,448 28,138 86,595 - 86,595 47,064 5,448 18,258 70,770 - 70,770 29 statement of changes in equity Year ended 30 June 2010 ATTRIBUTABLE TO THE STAPLED SECURITY HOLDER ASSET REVALUATION RESERVE FOREIGN CURRENCY TRANSLATION EMPLOYEE EQUITY BENEFITS RETAINED EARNINGS EXTERNAL NON- CONTROLLING INTEREST TOTAL EQUITY $’000 $’000 1,048 (706) - (706) - - - - - $’000 $’000 $’000 $’000 (4,028) 5,448 (14,647) 14,409 989,727 53 - 53 - - - - - - - - - - - - - - - (653) 25,436 25,436 (443) 24,993 (443) 24,340 - - - - - - - - 106,265 14,272 4,720 (2,237) (34,051) (167) (34,218) ISSUED CAPITAL $’000 987,497 - - - 106,265 14,272 4,720 (2,237) - 1,110,517 342 (3,975) 5,448 (23,262) 13,799 1,102,869 CONSOLIDATED At 1 July 2009 Other comprehensive income/(expense) Net income for the year Total comprehensive income for the period Equity raisings Distribution reinvestment plan Treasury units Issue costs Distribution to security holders At 30 June 2010 3030 CONSOLIDATED At 1 July 2008 Other comprehensive income / (expense) Net loss for the year Total comprehensive income/expense for the period Equity raisings Distribution reinvestment plan Issue costs Securities issued Acquisition of interest in Abacus Wollongong Trust Minority interest in acquisition of Abacus Jigsaw Trust Sale of interest U-Stow- It Holdings Sale of interest Fern Bay Sale of interest in Hobart Growth Distribution to security holders Share based payments At 30 June 2009 ATTRIBUTABLE TO THE STAPLED SECURITY HOLDER ASSET REVALUATION RESERVE FOREIGN CURRENCY TRANSLATION EMPLOYEE EQUITY BENEFITS $’000 - $’000 (3,559) $’000 3,906 ISSUED CAPITAL $’000 771,502 EXTERNAL NON- CONTROLLING INTEREST TOTAL EQUITY $’000 18,560 $’000 924,999 RETAINED EARNINGS $’000 134,590 - - - 1,048 (469) - - 1,048 (469) 211,880 8,996 (4,881) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 579 (102,412) (578) (102,990) (102,412) (578) (102,411) - - - - - - - - - 8,461 211,880 8,996 (4,881) 8,461 (126) (126) 5,680 5,680 (286) (15,586) (15,872) (65) - - (65) (2,002) (2,002) (46,474) - (46,474) - 987,497 - 1,048 - (4,028) 1,542 5,448 - (14,647) - 14,409 1,542 989,727 31 statement of changes in equity (continued) Year ended 30 June 2010 PARENT At 1 July 2009 Net income for the year Total comprehensive income for the period Equity raisings Distribution reinvestment plan Share based payments At 30 June 2010 PARENT At 1 July 2008 Net income for the year Total comprehensive income for the period Equity raisings Distribution reinvestment plan Share based payments At 30 June 2009 ISSUED CAPITAL $’000 47,064 - - 5,240 705 - 53,009 ISSUED CAPITAL $’000 33,116 - - 13,533 415 - 47,064 EMPLOYEE EQUITY BENEFITS $’000 5,448 - - - - - 5,448 EMPLOYEE EQUITY BENEFITS $’000 3,906 - - - - 1,542 5,448 RETAINED EARNINGS TOTAL EQUITY $’000 18,258 12,602 12,602 - - (2,722) 28,138 $’000 70,770 12,602 12,602 5,240 705 (2,722) 86,595 RETAINED EARNINGS $’000 (10,724) 28,982 28,982 - - - 18,258 TOTAL EQUITY $’000 26,298 28,982 28,982 13,533 415 1,542 70,770 32 consolidated cash flow statement Year ended 30 June 2010 CASH FLOWS FROM OPERATING ACTIVITIES Income receipts Interest received Distributions received Income tax paid Borrowing costs paid Operating payments NET CASH FLOWS FROM OPERATING ACTIVITIES CASH FLOWS FROM INVESTING ACTIVITIES Payments for investments and funds advanced Proceeds from sale and settlement of investments and funds repaid Purchase of property, plant and equipment Disposal of property, plant and equipment Disposal of controlled entity Purchase of investment properties Disposal of investment properties Purchase of inventories Payment for other investments NET CASH FLOWS USED IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of stapled securities Payment of issue / finance costs Repayment of borrowings Proceeds from borrowings Distributions paid NET CASH FLOWS FROM/(USED IN) FINANCING ACTIVITIES NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS Net foreign exchange differences Cash and cash equivalents at beginning of year CASH AND CASH EQUIVALENTS AT END OF YEAR NOTES CONSOLIDATED 2010 $’000 2009 $’000 134,581 632 1,211 (2,447) (26,297) (43,075) 64,605 156,870 1,215 688 (118) (43,967) (49,100) 65,588 11 2010 $’000 1,840 56 1,050 - (493) (1,976) 477 PARENT 2009 $’000 7,635 31 591 - (727) (2,552) 4,978 (76,665) (179,692) (54,120) (49,685) 54,214 83,400 48,318 29,245 (185) 944 - (37,143) 62,556 (86,995) (1,345) (84,619) 110,986 (8,101) (300,771) 250,958 (20,452) (150) - 25,424 (55,983) 54,020 - 10,336 (62,645) 211,463 (5,787) (309,424) 123,964 (60,895) - - - - - - (256) (6,058) 5,945 - - 357 - - - - (1,105) - - - (21,545) 13,948 - - 554 - 32,620 (40,679) 6,302 14,502 12,606 (37,736) 721 (2,065) 62 9,124 21,792 83 46,777 9,124 - 275 996 - 2,340 275 11 33 notes to the financial statements 30 June 2010 The Corporations Amendment (Corporate Reporting Reform) Act 2010 was enacted in June 2010 and has amended the Corporations Act so that a consolidated reporting group is required to prepare consolidated financial statements rather than parent entity financial statements. The Group have applied ASIC Class Order 10/654, issued by the Australian Securities and Investments Commission, which allows disclosing entities that present consolidated financial statements to include parent entity financial statements. In addition, the class order also provides relief from presenting summarised parent entity information in the consolidated financial statements. (b) Statement of Compliance The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS), as issued by the IASB. (c) New accounting standards and interpretations (i) Changes in accounting policy and disclosures. The accounting policies adopted are consistent with those of the previous financial year and the Group has adopted the new and amended Australian Accounting Standards and AASB Interpretations as of 1 January 2009. When the adoption of the Standard or Interpretation is deemed to have an impact on the financial statements or performance of the Group, its impact is described on following page: 1. CORPORATE INFORMATION Abacus Property Group (“APG” or the “Group”) is comprised of Abacus Group Holdings Limited (“AGHL”), Abacus Trust (“AT”), Abacus Group Projects Limited (“AGPL”) and Abacus Income Trust (“AIT”). Shares in AGHL and AGPL and units in AT and AIT and have been stapled together so that neither can be dealt with without the other. The securities trade as one security on the Australian Securities Exchange (“the “ASX”) under the code ABP. The financial report of the Group for the year ended 30 June 2010 was authorised for issue in accordance with a resolution of the directors on 27 August 2010. The nature of the operations and principal activities of the Group are described in the Directors’ Report 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Preparation The financial report is a general-purpose financial report, which has been prepared in accordance with the requirements of the Corporations Act 2001 and Australian Accounting Standards. The financial report has also been prepared on a historical cost basis, except for investment properties and derivative financial instruments which have been measured at fair value, interests in joint ventures and associates which are accounted for using the equity method, and certain investments and financial assets measured at fair value. The carrying values of recognised assets and liabilities that are covered by interest rate swap arrangements, are adjusted to record changes in the fair values attributable to the risks that are being covered by derivative financial instruments. The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($’000) unless otherwise stated under the option available to the Group under ASIC Class Order 98/100. The Group is an entity to which the class order applies. 34 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (c) New accounting standards and interpretations (continued) AASB 127 Consolidated and Separate Financial Statements (revised 2008) AASB 127 (revised 2008) requires that a change in the ownership interest of a subsidiary (without a change in control) is to be accounted for as a transaction with owners in their capacity as owners. Therefore such transactions will no longer give rise to goodwill, nor will they give rise to a gain or loss in the statement of comprehensive income. Furthermore the revised Standard changes the accounting for losses incurred by a partially owned subsidiary as well as the loss of control of a subsidiary. The changes in AASB 3 (revised 2008) and AASB 127 (revised 2008) will affect future acquisitions, changes in, and loss of control of, subsidiaries and transactions with non-controlling interests. AASB 7 Financial Instruments: Disclosures The amended Standard requires additional disclosures about fair value measurement and liquidity risk. Fair value measurements related to all financial instruments recognised and measured at fair value are to be disclosed by source of inputs using a three level fair value hierarchy, by class. In addition, a reconciliation between the beginning and ending balance for level 3 fair value measurements is now required, as well as significant transfers between levels in the fair value hierarchy. The amendments also clarify the requirements for liquidity risk disclosures with respect to derivative transactions and assets used for liquidity management. The fair value measurement disclosures are presented in note 22 (vi). The liquidity risk disclosures are not significantly impacted by the amendments and are presented in note 22 (ii). AASB 8 Operating Segments AASB 8 replaced AASB 114 Segment Reporting upon its effective date. The Group concluded that the operating segments determined in accordance with AASB 8 are the same as the business segments previously identified under AASB 114. AASB 8 disclosures are shown in note 5, including the related revised comparative information. AASB 101 Presentation of Financial Statements The revised Standard separates owner and non-owner changes in equity. The statement of changes in equity includes only details of transactions with owners, with non-owner changes in equity presented in a reconciliation of each component of equity and included in the new statement of comprehensive income. The statement of comprehensive income presents all items of recognised income and expense, either in one single statement, or in two linked statements. The Group has elected to present two linked statements. The change in accounting policies above were applied prospectively and had no material impact on earnings per share. (ii) Accounting Standards and Interpretations issued but not yet effective. Australian Accounting Standards and Interpretations that have recently been issued or amended but are not yet effective have not been adopted by the Group for the annual reporting period ended 30 June 2010. These are outlined in the table on the following page. 35 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) APPLICATION DATE FOR GROUP* 1 July 2010 APPLICATION DATE OF STANDARD* 1 January 2010 IMPACT ON GROUP FINANCIAL REPORT The Group will be required to review and revise presentation, recognition or measurement where required for the Accounting Standards noted, particularly, AASB 117 - Leases and AASB 107 - Cash Flow. REFERENCE SUMMARY AASB 2009-5 Amendments to Australian Accounting Standards arising from the Annual Improvements Project The amendments to some Standards result in accounting changes for presentation, recognition or measurement purposes, while some amendments that relate to terminology and editorial changes are expected to have no or minimal effect on accounting except for the following: The amendment to AASB 117 removes the specific guidance on classifying land as a lease so that only the general guidance remains. Assessing land leases based on the general criteria may result in more land leases being classified as finance leases and if so, the type of asset which is to be recorded (intangible vs property, plant & equipment) needs to be determined. The amendment to AASB 101 stipulates that the terms of a liability that could result, at anytime, in its settlement by the issuance of equity instruments at the option of the counterparty do not affect its classification. The amendment to AASB 107 explicitly states that only expenditure that results in a recognised asset can be classified as a cash flow from investing activities. The amendment to AASB 118 provides additional guidance to determine whether an entity is acting as a principal or as an agent. The features indicating an entity is acting as a principal are whether the entity: - has primary responsibility for providing the goods or service; - has inventory risk - has discretion in establishing prices - bears the credit risk The amendment to AASB 136 clarifies that the largest unit permitted for allocating goodwill acquired in a business combination is the operating segment, as defined in IFRS 8 before aggregation for reporting purposes. The main change to AASB139 clarifies that a prepayment option is considered closely related to the host contract when the exercise price of a prepayment option reimburses the lender up to the approximate present value of lost interest for the remaining term of the host contract. The other changes clarify the scope exemption for business combination contracts and provide clarification in relation to accounting for cash flow hedges. 36 abacus property group REFERENCE SUMMARY AASB 9 Financial Instruments AASB 9 includes requirements for the classification and measurement of financial assets resulting from the first part of Phase 1 of the IASB’s project to replace IAS 39 Financial Instruments: Recognition and Measurement (AASB 139 Financial Instruments: Recognition and Measurement). APPLICATION DATE OF STANDARD* 1 January 2013 IMPACT ON GROUP FINANCIAL REPORT The Group will review the classification of its financial assets in line with the standard, such as secured and related party loans and options. APPLICATION DATE FOR GROUP* 1 July 2013 These requirements improve and simplify the approach for classification and measurement of financial assets compared with the requirements of AASB 139. The main changes from AASB 139 are described below. (a) Financial assets are classified based on (1) the objective of the entity’s business model for managing the financial assets; (2) the characteristics of the contractual cash flows. This replaces the numerous categories of financial assets in AASB 139, each of which had its own classification criteria. (b) AASB 9 allows an irrevocable election on initial recognition to present gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. Dividends in respect of these investments that are a return on investment can be recognised in profit or loss and there is no impairment or recycling on disposal of the instrument. (c) Financial assets can be deregistered and measured at fair value through profit or loss at initial recognition if doing so eliminates or significantly reduces a measurement or recognition inconsistency that would arise from measuring assets or liabilities, or recognising the gains and losses on them, on different bases. 37 notes to the financial statements 30 June 2010 APPLICATION DATE OF STANDARD* 1 January 2013 IMPACT ON GROUP FINANCIAL REPORT The Group will review the classification of its financial assets in line with the standard, such as secured and related party loans and options. APPLICATION DATE FOR GROUP* 1 July 2013 1 January 2011 1 July 2011 The revision will not have a significant impact on the Group’s financial statements. The Group will review the definitions to clarify the disclosure requirements. REFERENCE SUMMARY AASB 2009-11 Amendments to Australian Accounting Standards arising from AASB 9 AASB 124 Related Party Disclosures The revised Standards introduces a number of changes to the accounting for financial assets, the most significant of which includes: - two categories for financial assets being amortised cost or fair value - removal of the requirement to separate embedded derivatives in financial assets - strict requirements to determine which financial assets can be classified as amortised cost or fair value, Financial assets can only be classified as amortised cost if (a) the contractual cash flows from the instrument represent principal and interest and (b) the entity’s purpose for holding the instrument is to collect the contractual cash flows. - an option for investments in equity instruments which are not held for trading to recognise fair value changes through other comprehensive income with no impairment testing and no recycling through profit or loss on derecognition. - reclassifications between amortised cost and fair value no longer permitted unless the entity’s business model for holding the asset changes. - changes to the accounting and additional disclosures for equity instruments classified as fair value through other comprehensive income. The revised AASB 124 simplifies the definition of a related party, clarifying its intended meaning and eliminating inconsistencies from the definition, including: (a) the definition now identifies a subsidiary and an associate with the same investor as related parties of each other; (b) entities significantly influenced by one person and entities significantly influenced by a close member of the family of that person are no longer related parties of each other; and (c) the definition now identifies that, whenever a person or entity has both joint control over a second entity and joint control or significant influence over a third party, the second and third entities are related to each other. A partial exemption is also provided from the disclosure requirements for government-related entities. Entities that are related by virtue of being controlled by the same government can provide reduced related party disclosures. 38 abacus property group REFERENCE SUMMARY AASB 2010-3 Limits the scope of the measurement choices of non-controlling interest at proportionate share of net assets in the event of liquidation. Other components of NCI are measured at fair value. Requires an entity (in a business combination) to account for the replacement of the acquiree’s share- based payment transactions (whether obliged or voluntarily), i.e., split between consideration and post combination expenses. Clarifies that contingent consideration from a business combination that occurred before the effective date of AASB3 Revised is not restated. APPLICATION DATE OF STANDARD* 1 July 2010 APPLICATION DATE FOR GROUP* 1 July 2010 IMPACT ON GROUP FINANCIAL REPORT The revision will not have a significant impact on the Group’s financial statements. The Group will review the revision to clarify the disclosure requirements. AASB 2010-4 Emphasises the interaction between quantitative and qualitative AASB 7 disclosures and the nature and extent of risks associated with financial instruments. 1 January 2011 Clarifies that an entity will present an analysis of other comprehensive income for each component of equity, either in the statement of changes in equity or in the notes to the financial statements. Provides guidance to illustrate how to apply disclosure principles in AASB 134 for significant events and transactions. 1 July 2011 The revision will not have a significant impact on the Group’s financial statements. The Group will review the revision to clarify the disclosure requirements. AASB 2009-12 The amendment makes numerous editorial changes to a range of Australian Accounting Standards and Interpretations. 1 January 2011 The amendment to AASB 124 clarifies and simplifies the definition of a related party. 1 July 2011 The revision will not have a significant impact on the Group’s financial statements. The Group will review the revision to clarify the disclosure requirements. *designates the beginning of the applicable annual reporting period AASB 2009-8, AASB 2009-9, AASB 2009-10, AASB 2009-13, AASB 2009-14, AASB 1053, AASB 2010-2 and Interpretation 19 will have no application to the Group. 39 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) Basis of consolidation The consolidated financial statements comprise the financial statements of AGHL and its subsidiaries, AT and its subsidiaries, AGPL and its subsidiaries, and AIT and its subsidiaries collectively referred to as the Group. The financial statements of subsidiaries are prepared for the same reporting period as the parent company, using consistent accounting policies with adjustments made to bring into line any dissimilar accounting policies that may exist. All intercompany balances and transactions, including unrealised profits from intra-group transactions, have been eliminated in full and subsidiaries are consolidated from the date on which control is transferred to the Group and cease to be consolidated from the date on which control is transferred out of the Group. Where there is a loss of control of a subsidiary, the consolidated financial statements include the results for the part of the reporting period during which the Group has control. The acquisition of subsidiaries is accounted for using the purchase method of accounting. The purchase method of accounting involves allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition. Non-controlling interests represent those equity interests in Abacus Jigsaw Trust and Abacus Independent Retail Property Trust that are not held by the Group and are presented separately in the income statement and within equity in the consolidated balance sheet. (e) Foreign currency translation Functional and presentation currency Both the functional and presentation currency of the Group are in Australian dollars. Each entity in the Group determines its own functional currency and items are included in the financial statements of each entity are measured using that functional currency. Transactions and balances Transactions in foreign currencies are initially recorded in the functional currency by applying the exchange rates ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated at the rate of exchange ruling at the balance sheet date. All exchange differences in the consolidated financial report are taken to profit or loss with the exception of differences on foreign currency borrowings that provide a hedge against a net investment in a foreign operation. These are taken directly to equity until the disposal of the net investment, at which time they are recognised in profit or loss. On disposal of a foreign operation, the cumulative amount recognised in equity relating to that particular foreign operation is recognised in profit or loss. Tax charges and credits attributable to exchange differences on those borrowings are also recognised in equity. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate as at the date of the initial transaction. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. At reporting date the assets and liabilities of these entities are translated into the presentation currency of the Group at the rate of exchange prevailing at balance date and the financial performance is translated at the average exchange rate prevailing during the reporting period. The exchange differences arising on translation are taken directly to the foreign currency translation reserve in equity. 40 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (f) Revenue recognition Revenue is recognised and measured at the fair value of the consideration received or receivable to the extent it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. The following specific recognition criteria must also be met before revenue is recognised: Rental income Rental income from investment properties is accounted for on a straight-line basis over the lease rental income is recognised as income in the periods in which it is earned. Lease incentives granted are recognised as an integral part of the total rental income. term. Contingent Finance Income Revenue is recognised as interest accrues using the calculating effective interest method. This is a method of the amortised cost of a financial asset and allocating the interest income over the relevant period using the effective interest rate, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to the net carrying amount of the financial asset. Dividends and distributions Revenue is recognised when the Group’s right to receive the payment is established. Net change in fair value of investments and financial instruments derecognised during the year Revenue from sale of investments is recognised on settlement when the significant risks and rewards of the ownership of the investments have been transferred to the buyer. Risks and rewards are generally considered to have passed to the buyer at the time of settlement of the sale. Financial instruments are derecognised when the right to receive or pay cash flows from the financial derivative has expired or when the entity transfers substantially all the risks and rewards of the financial derivative through termination. Gains or losses due to derecognition are recognised in the statement of comprehensive income. Net change in fair value of investments held at balance date Change in net market value of investments is recognised as revenue or expense in determining the net profit for the period. Property development sales Revenue from property development sales is recognised when the significant risks, rewards of ownership and effective control has been transferred to the purchaser which has been determined to occur upon settlement and after contractual duties are completed. No revenue is recognised if there are significant uncertainties regarding recovery of the consideration due, the costs incurred or to be incurred cannot be measured reliably, there is a risk of return or there is continuing management involvement to the degree usually associated with ownership. (g) Expenses Expenses including rates, taxes and other outgoings, are brought to account on an accrual basis and any related payables are carried at cost. (h) Cash and cash equivalents Cash and cash equivalents in the balance sheet comprise cash at bank and in hand and short-term deposits with an original maturity of three months or less that are readily convertible to known amounts of cash which are subject to an insignificant risk of changes in value. For the purposes of the Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above. (i) Trade and other receivables Trade receivables, which generally have 30 day terms, are recognised at amortised cost, which in the case of the Group, is the original invoice amount less an allowance for any uncollectible amounts. Collectibility of trade receivables is reviewed on an ongoing basis. An allowance for doubtful debts is raised when there is objective evidence that collection of the full amount is no longer probable. Bad debts are written off when identified. 41 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (j) Derivative financial instruments and hedging The Group uses derivative financial instruments such as interest rate swaps to hedge its risks associated with interest rate. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured to fair value. Derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Any gains or losses arising from changes in the fair value of derivatives are taken directly to profit or loss for the year. The fair values of interest rate swaps are determined by reference to market values for similar instruments. (k) Investments and other financial assets All investments are initially recognised at cost, being the fair value of the consideration given. Financial assets in the scope of AASB 139 Financial Instruments: Recognition and Measurement are classified as either financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available-for-sale financial assets. The Group determines the classification of its financial assets after initial recognition and, when allowed and appropriate, re- evaluates this designation at each financial year-end. At 30 June 2009 the Group’s investments in listed and unlisted securities have been classified as either financial assets at fair value through profit or loss and property loans are classified as loans and receivables. Recognition and derecognition Purchases and sales of financial assets that require delivery of assets within the time frame generally established by regulation or convention in the market place are recognised on the trade date i.e. the date that the Group commits to purchase the assets. Financial assets are derecognised when the right to receive cash flows from the financial assets have expired or been transferred. Financial assets at fair value through profit or loss For investments where there is no quoted market or unit price, fair value is determined by reference to the current market value of another instrument which is substantially the same or is calculated based on the expected cash flows of the underlying net asset base of the investment. After initial recognition, investments, which are classified as held for trading, are measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term with the intention of making a profit. Gains or losses on investments held for trading are recognised in the income statement. For investments that are actively traded in organised financial markets, fair value is determined by reference to Securities Exchange quoted market bid prices at the close of business on the balance sheet date. A financial asset or financial liability at fair value through the profit and loss is also a financial asset or financial liability that upon initial recognition is designated by the entity as at fair value through the profit and loss. APG uses this designation where doing so results in more relevant information. This group of financial assets and liabilities are managed and their performance evaluated on a fair value basis, in accordance with APG’s documented risk management and investment strategy which outlines that these assets and liabilities are managed on a total rate of return basis, and information about the instruments is provided internally on that basis to the entity’s key management personnel and the Board. APG enters into loans and receivables with associated options that provide for a variety of outcomes including repayment of principal and interest, satisfaction through obtaining interests in equity or property or combinations thereof. The fair value of the maximum exposure to credit risk in relation to these instruments was $35.4 million (2009: $18 million). Loans and receivables Loans and receivables including loan notes and loans to key management personnel are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in profit or loss when the loans and receivables are derecognised or impaired, as well as through the amortisation process. 42 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Investments and other financial assets (continued) Subsidiaries Investment in subsidiaries are held at lower of cost or recoverable amount. (l) Investment in associates The Group’s investment in its associates is accounted for under the equity method of accounting in the consolidated financial statements. The associates are entities over which the Group has significant influence but not control and accordingly are neither subsidiaries nor joint ventures. The investment in the associates is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the associates, less any impairment in value. The Group’s share of its associates’ post-acquisition profits or losses is recognised in the income statement, and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured long-term receivable and loans, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The reporting dates of the associates and the Group are identical and the associates’ accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Investments in associates held by the parent are held at cost in the parent’s financial statements. (m) Interest in joint ventures Joint venture entities The Group’s interest in joint venture entities is accounted for under the equity method of accounting in the consolidated financial statements. The investment in the joint venture entities is carried in the consolidated balance sheet at cost plus post-acquisition changes in the Group’s share of net assets of the joint ventures, less any impairment in value. The consolidated income statement reflects the Group’s share of the results of operations of the joint ventures. Investments in joint ventures are held at cost in the investing entities. Joint venture assets The Group’s interest in joint venture assets is accounted for in the financial statements by proportionately consolidating its interests in the assets and liabilities of the joint venture. The Group also recognises its share of the expenses that the joint venture incurs and its share of the income that the joint venture earns. 43 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) Property, plant and equipment Land and buildings are measured at fair value, based on periodic valuations by external independent valuers, less accumulated depreciation on buildings and less any impairment losses recognised after the date of the revaluation. Plant and equipment is stated at historical cost less accumulated depreciation and any impairment losses. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows: Buildings – 40 years Plant and equipment – over 5 to 15 years Revaluations of land and buildings Any revaluation increment is credited to the asset revaluation reserve included in the equity section of the balance sheet except to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss. Any revaluation decrease is recognised in profit or loss except to the extent that it offsets a previous revaluation increase for the same asset in which case the decrease is debited directly to the asset revaluation reserve to the extent of the credit balance existing in the revaluation reserve for that asset. Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These are included in the income statement. Any accumulated depreciation as at the revaluation date is eliminated against the gross carrying amounts of the assets and the net amounts are restated to the revalued amounts of the assets. Upon disposal, any revaluation reserve relating to the particular asset being sold is transferred to retained earnings. Disposal An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. (o) Investment properties Investment properties are measured initially at cost, including transaction costs. The carrying amount includes the cost of replacing parts of an existing investment property at the time that the cost is incurred if the recognition criteria are met, and excludes the costs of day- to-day servicing of an investment property. Subsequent to initial recognition, investment properties are stated at fair value, which reflects market conditions at the balance sheet date. Gains or losses arising from changes in the fair values of investment properties are recognised in profit or loss in the year in which they arise. Investment properties are derecognised either when they have been disposed of or when the investment property is permanently withdrawn from use and no future economic benefit is expected from its disposal. Any gains or losses on the retirement or disposal of an investment property are recognised in profit or loss in the year of retirement or disposal. Transfers are made to investment property when, and only when, there is a change in use, evidenced by commencement of an operating lease to another party or ending of construction or development. Transfers are made from investment property when, and only when, there is a change in use, evidenced by commencement of development with a view to sale. 44 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (o) Investment properties (continued) For a transfer from investment property to inventories, the deemed cost of property for subsequent accounting is its fair value at the date of change in use. For a transfer from inventories to investment property, any difference between the fair value of the property at that date and its previous carrying amount is recognised in profit or loss. When the Group completes the construction or development of a “self-constructed investment property”, any difference between the fair value of the property at that date and its previous carrying amount is recognised in profit or loss. Land and buildings are considered to have the function of an investment and are therefore regarded as a composite asset, the overall value of which is influenced by many factors, the most prominent being income yield, rather than diminution in value of the building content due to the passing of time. Accordingly, the buildings and all components thereof, including integral plant and equipment, are not depreciated. The directors obtain independent valuations on investment properties annually to ensure that the carrying amount does not differ materially from the assets’ fair value. The cycle of this review is staggered such that investment properties are independently revalued in either the June or the December reporting cycles. In determining fair value, the capitalisation of net income method and the discounting of future cashflows to their present value have been used. Lease incentives provided by the Group to lessees, and rental guarantees which may be received by the Group from third parties (arising from the acquisition of investment properties) are included in the measurement of fair value of investment property and are treated as separate assets. Such assets are amortised over the respective periods to which the lease incentives and rental guarantees apply, either using a straight-line basis, or a basis which is more representative of the pattern of benefits. Under AASB 140, investment properties, including any plant and equipment, are not subject to depreciation. However, depreciation allowances in respect of certain buildings, plant and equipment are currently available to investors for taxation purposes. Gains and losses arising from changes in the fair value of investment properties are included in the income statement in the year in which they arise. Any gains or losses on the sale of investment properties are recognised in the income statement in the year of sale. (p) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Group as lessee Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Lease incentives are recognised in the income statement as an integral part of the total lease expense. Group as a lessor Leases in which the Group retains substantially all the risks and benefits of ownership of the lease assets are classified as operating leases. The initial direct cost incurred in negotiating an operating lease is added to the carrying amount of the leased asset and recognised as an expense over the lease term on the same basis as rental income. 45 notes to the financial statements 30 June 2010 Intangible assets Intangible assets acquired separately or in a business combination are initially measured at cost. Following initial recognition, intangibles are carried at cost less accumulated amortisation and impairment losses. Intangible assets created within the business are not capitalised and expenditure is charged against profits in the period in which the expenditure is incurred. The useful lives of these intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible asset maybe impaired. The amortisation period and the amortisation method for an intangible asset with a finite life is reviewed at least each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefit embodied in the asset are accounted for prospectively by changing the amortisation period or method, as appropriate, which is a change in an accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in the income statement through the ‘depreciation and amortisation expense’ line item. Intangible assets with indefinite useful lives are tested for impairment annually either individually or at the cash generating unit level. Such intangibles are not amortised. The useful life of an intangible asset with an indefinite life is reviewed each reporting period to determine whether the indefinite life assessment continues to be supportable. If not, the change in the useful life assessment from indefinite to finite is accounted for as a change in an accounting estimate and is thus accounted for on a prospective basis. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (q) Goodwill and Intangibles Goodwill Goodwill on acquisition is initially measured at cost being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses and is not amortised. Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired. This policy for Goodwill is for acquisitions pre 1 July 2009. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group’s cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the Group are assigned to those units or groups of units. Each unit or group of units to which the goodwill is so allocated: • Represents the lowest level within the Group at which the goodwill is monitored for internal management purposes; and • Is not larger than a segment based on either the Group’s primary or the Group’s secondary reporting format determined in accordance with AASB 114 Segment Reporting. Impairment is determined by assessing the recoverable amount of the cash-generating unit (group of cash- generating units), to which the goodwill relates. When the recoverable amount of the cash-generating unit (group of cash-generating units) is less that the carrying amount, an impairment loss is recognised. When goodwill forms part of a cash-generating unit (group of cash-generating units) and an operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this manner is measured based on the relative values of the operation disposed of and the portion of the cash-generating unit retained. Impairment losses recognised for goodwill are not subsequently reversed. 46 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the liability. The increase in the provision resulting from the passage of time is recognised in finance costs. (r) Impairment of non-financial assets other than goodwill Intangible assets that have an indefinite useful life are not subject to amortisation and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired. Other assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. Recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). Non-financial assets other that goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. (s) Trade and other payables Trade payables and other payables are carried at amortised cost. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured and are usually paid within 30 days of recognition. (t) Provisions and employee leave benefits Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. Provisions are measured at the present value of management’s best estimate of the expenditure required to settle the present obligation at the balance sheet date. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects the time value of money and the risks specific to Employee leave benefits i) Wages, salaries, annual leave and sick leave Liabilities for wages and salaries, including non-monetary benefits, annual leave and accumulating sick leave expected to be settled within 12 months of the reporting date are recognised in respect of employees’ services up to the reporting date. They are measured at the amounts expected to be paid when the liabilities are settled. Liabilities for non-accumulating sick leave are recognised when the leave is taken and are measured at the rates paid or payable. ii) Long service leave The liability for long service leave is recognised and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date using the projected unit credit method. Consideration is given to expected future wage and salary levels, experience of employee departures, and periods of service. Expected future payments are discounted using market yields at the reporting date on national government bonds with terms to maturity and currencies that match, as closely as possible, the estimated future cash outflows. (u) Distributions and dividends The Trusts generally distribute their distributable assessable income to their unitholders. Such distributions are determined by reference to the taxable income of the respective Trusts. Distributable income may include capital gains arising from the disposal of investments and tax-deferred income. Unrealised gains and losses on investments that are recognised as income are usually retained and are generally not assessable or distributable until realised. Capital losses are not distributed to security holders but are retained to be offset against any future realised capital gains. A liability for dividend or distribution is recognised in the Balance Sheet if the dividend or distribution has been declared, determined or publicly recommended prior to balance date. 47 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (v) Interest-bearing loans and borrowings All loans and borrowings are initially recognised at cost, being the fair value of the consideration received net of transaction costs associated with the borrowing. After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method. Fees paid in the establishment of loan facilities that are yield related are included as part of the carrying amount of loans and borrowings. Borrowings are classified as current liabilities where the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date. Borrowing Costs Borrowing costs are recognised as an expense when incurred unless they relate to a qualifying asset or to upfront borrowing establishment and arrangement costs, which are deferred and amortised as an expense over the life of the facility or five years whichever is shorter. A qualifying asset is an asset that generally takes more than 12 months to get ready for its intended use or sale. In these circumstances, the financing costs are capitalised into the cost of the asset. Where funds are borrowed by the Group for the acquisition or construction of a qualifying asset, the amount of the borrowing costs capitalised are those incurred in relation to the borrowing. (w) Contributed equity Issued and paid up capital is recognised at the fair value of the consideration received by the Group. Stapled securities are classified as equity. Incremental costs directly attributable to the issue of new securities are shown in equity as a deduction, net of tax, from the proceeds. (x) Transfers to (from) total equity In respect of the Group, revaluation increments or decrements arising from changes in the fair value of investment properties and derivative financial instruments, unrealised gains and losses in the net value of investments, accrued income not yet assessable and expenses provided for or accrued not yet deductible, net capital losses and tax free or tax deferred amounts maybe transferred to equity and may not be included in the determination of distributable income. (y) Non-current assets held for sale Before classification as held for sale the measurement of the assets is updated. Upon classification as held for sale, assets are recognised at the lower of carrying amount and fair value less costs to sell. Gains and losses from revaluations on initial classification and subsequent re-measurement are recognised in the income statement. (z) Inventories (property development) Inventories are stated at the lower of cost and net realisable value. Net realisable value is determined on the basis of sales in the ordinary course of business. Expenses of marketing, selling and distribution to customers are estimated and deducted to establish net realisable value. The amount of any reversal of write-down of inventories arising from a change in the circumstances that gave rise to the original write down, is recognised as a reduction in the impairment of inventories recognised as an expense. Cost includes the purchase consideration, development and holding costs such as borrowing costs, rates and taxes. 48 abacus property group 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (za) Taxation The Group comprises taxable and non-taxable entities. A liability for current and deferred tax and tax expense is only recognised in respect of taxable entities that are subject to income tax and potential capital gains tax as detailed below. Abacus Trust and Abacus Income Trust Under current Australian income tax legislation neither AT or AIT are liable to Australian income tax provided security holders are presently entitled to the taxable income of the Trusts and the Trusts generally distribute their taxable income. Company income tax AGHL and its Australian resident wholly-owned subsidiaries have formed a Tax Consolidation Group. AGHL has entered into tax funding agreements with its Australian resident wholly-owned subsidiaries, so that each subsidiary agrees to pay or receive its share of the allocated tax at the current tax rate. The head entity, AGHL and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. In addition to its own current and deferred tax amounts, AGHL also recognises the current tax liabilities (or assets) and the deferred tax assets arising from unused tax losses and unused tax credits assumed from controlled entities in the tax consolidated group. Assets or liabilities arising under tax funding agreements with the tax consolidated entities are recognised as amounts receivable from or payable to other entities in the group. Any difference between the amounts assumed and amounts receivable of payable under the tax funding agreement are recognised as a contribution to (or distribution from) wholly-owned tax consolidated entities. Current tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date. Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry- forward of unused tax assets and unused tax losses can be utilised, except: • • when the deferred income tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or when the deductible temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilised. 49 notes to the financial statements 30 June 2010 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (za) Taxation (continued) The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered. Deferred income tax is provided on all temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred income tax liabilities are recognised for all taxable temporary differences, except: • when the deferred income tax liability arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; or • when the taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, and the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future. Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date. Income taxes relating to items recognised directly in equity are recognised in equity and not in the income statement. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Goods and services tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except when the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet. Cash flows are included in the Cash Flow Statement on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. (zb) Earnings per stapled security (EPSS) Basic EPSS is calculated as net profit attributable to stapled securityholders, adjusted to exclude costs of servicing equity (other than distributions) divided by the weighted average number of stapled securities on issue during the period under review. Diluted EPSS is calculated as net profit attributable to stapled securityholders, adjusted for: • costs of servicing equity (other than distributions); the after tax effect of dividends and interest associated with dilutive potential stapled securities that have been recognised as expenses; and • other non-discretionary changes in revenues or expenses during the period that would result from the dilution of potential stapled securities; divided by the weighted average number of stapled securities and dilutive potential stapled securities, adjusted for any bonus element. 50 abacus property group 3. FINANCIAL RISK MANAGEMENT The Group manages its exposure to risk by: The risks arising from the use of the Group’s financial instruments are credit risk, liquidity risk and market risk (interest rate risk , price risk and foreign currency risk). The Group’s financial risk management focuses on mitigating the unpredictability of the financial markets and its impact on the financial performance of the Group. The Board reviews and agrees policies for managing each of these risks, which are summarised below. Primary responsibility for identification and control financial risks rests with the Treasury Management Committee under the authority of the Board. The Board reviews and agrees policies for managing each of the risks identified below, including the setting of limits for trading in derivatives, hedging cover of interest rate risks and cash flow forecast projections. The main purpose of the financial instruments used by the Group is to raise finance for the Group’s operations. The Group has various other financial assets and liabilities such as trade receivables and trade payables, which arise directly from its operations. The Group also enters into derivative transactions principally interest rate swaps. The purpose is to manage the interest rate exposure arising from the Group’s operations and its sources of finance. Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity instrument are disclosed in notes 2 and 4 to the financial statements. (a) Credit Risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers, investment in securities, secured property loans and interest bearing loans and derivatives with banks. - - - - - - derivative counterparties and cash transactions are limited to high credit quality financial institutions; policy which limits the amount of credit exposure to any one financial institution; providing loans as an investment into joint ventures, associates, related parties and third parties where it is comfortable with the underlying property exposure within that entity; regularly monitoring loans and receivables balances on an ongoing basis; regularly monitoring the performance of its associates, joint ventures, related parties and third parties on an ongoing basis; and obtaining collateral as security (where required or appropriate). The Group’s credit risk is predominately driven by its Property Finance business which provides loans to third parties, those using the funds for property development. The Group mitigates the exposure to this risk by evaluation of the application before acceptance. The analysis will specifically focus on: - the Loan Valuation Ratio (LVR) at drawdown; - mortgage ranking; - - - background of the developer (borrower) including previous developments; that the terms and conditions of higher ranking mortgages are acceptable to the Group; appropriate property insurances are in place with a copy provided to the Group; and - market analysis of the completed development being used to service drawdown. The Group also mitigates this risk by ensuring adequate security is obtained and timely monitoring of the financial instrument to identify any potential adverse changes in the credit quality. 51 notes to the financial statements 30 June 2010 Foreign currency risk The Group is exposed to currency risk on its investment in foreign operations, equity investments, investment in associates and property loans denominated in a currency other than the functional currency of Group entities. The currencies in which these transactions primarily are denominated in NZD and to much lesser extent GBP and SGD. As a result the Group’s balance sheet can be affected by movements in the A$/NZ$, A$/GBP£ and A$/SGD$ exchange rates. The Group borrows loan funds in New Zealand dollars to substantially match the foreign currency property asset value exposure with a corresponding foreign currency liability and therefore expects to substantially mitigate foreign currency risk on its New Zealand denominated asset values. Interest rate risk The Group’s exposure to the risk of changes in market interest rates relates primarily to the Group’s long-term debt obligations with a floating interest rate. The Group’s policy is to manage its interest cost using a mix of fixed and variable rate debt. The Group’s aim is to keep between 60% and 100% of its borrowings at fixed rates of interest. To manage this mix in a cost-efficient manner, the Group enters into interest rate swaps, in which the Group agrees to exchange, at specified intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed- upon notional principal amount. At 30 June 2010, after taking into account the effect of interest rate swaps, approximately 51.2% of the Group’s borrowings are subject to fixed rate agreements (2009: 76.3%). 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (b) Liquidity risk Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, the availability of funding though an adequate and diverse amount of committed credit facilities, the ability to close out market positions and the flexibility to raise funds through the issue of new stapled securities or the distribution reinvestment plan. The Group’s policy is to maintain an available loan facility with banks sufficient to meet expected operational expenses and to finance investment acquisitions for a period of 90 days, including the servicing of financial obligations. Current loan facilities are assessed and extended for a maximum period based on the Group’s expectations of future interest and market conditions. As at 30 June 2010, the Group had undrawn committed facilities of $284 million and cash of $21.8 million which are adequate to cover short term funding requirements. Further information regarding the Group’s debt profile is disclosed in Note 20. (c) Refinancing Risk Refinancing risk is the risk that unfavorable interest rate and credit market conditions result in an unacceptable increase in the Group’s credit margins and interest cost. Refinancing risk arises when the Group is required to obtain debt to fund existing and new debt positions. The Group is exposed to refinancing risks arising from the availability of finance as well as the interest rates and credit margins at which financing is available. The Group manages this risk by spreading maturities of borrowings and interest rate swaps and reviewing potential transactions to understand the impact on the Group’s credit worthiness. (d) Market Risk Market risk is the risk that changes in market prices, such as foreign exchange rates, interest rates and equity prices will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. 52 abacus property group 3. FINANCIAL RISK MANAGEMENT (CONTINUED) (d) Market Risk (continued) Fair value interest rate risk As the Group holds interest rate swaps against its variable rate debt there is a risk that the economic value of a financial instrument will fluctuate because of changes in market interest rates. The level of fixed rate debt is disclosed in note 20 and it is acknowledged that this risk is a by-product of the Group’s attempt to manage its cash flow interest rate risk. (e) Other market price risk The Group is exposed to equity securities price risk. The key risk variable is the quoted price of securities which is influenced by a range of factors, most of which are outside the control of the Group. Management of the Group monitors the securities in its investment portfolio based on market indices and published prices. Investments within the portfolio are managed on an individual basis and all buy / sell decisions are approved by the Managing Director and the Chief Financial Officer. 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS In applying the Group’s accounting policies management continually evaluates judgments, estimates and assumptions based on experience and other factors, including expectations of future events that may have an impact on the Group. All judgments, estimates and assumptions made are believed to be reasonable based on the most current set of circumstances available to management. Actual results may differ from the judgments, estimates and assumptions. Significant judgments, estimates and assumptions made by management in the preparation of these financial statements are outlined below: (i) Significant accounting judgments Operating lease commitments – Group as lessor The Group has entered into commercial property leases on its investment property portfolio. The Group has determined that it retains all the significant risks and rewards of ownership of these properties and has thus classified the leases as operating leases. Recovery of deferred tax assets Deferred tax assets are recognised for deductible temporary differences and tax losses on revenue account as management considers that it is probable that future taxable profits will be available to utilise those temporary differences and tax losses. Classification of and valuation of investments The Group has decided to classify investments in listed and unlisted securities as ‘held for trading’ investments and movements in fair value are recognised directly in profit or loss. The fair value of listed securities has been determined by reference to published price quotations in an active market. The fair value of unlisted securities has been determined by reference to the net assets of the entity and available redemption facilities. Impairment of property loans and financial assets other than goodwill The Group assesses impairment of all assets at each reporting date by evaluating conditions specific to the Group and to the particular asset that may lead to impairment. If an impairment trigger exists the recoverable amount of the asset is determined. For property loans and interim funding to related funds this involves value in use calculations, which incorporate a number of key estimates and assumptions around cashflows and fair value of underlying investment properties held by the borrower and expected timing of cashflows from equity raisings of related funds. Accounting policy – financial assets and liabilities at fair value through profit and loss A financial asset or financial liability at fair value through profit or loss is also a financial asset or financial liability that upon initial recognition is designated by the entity as at fair value through profit or loss. APG uses this designation where doing so results in more relevant information, because it is a group of financial assets and liabilities which is managed and its performance is evaluated on a fair value basis, in accordance with APG’s documented risk management and investment strategy, and information about the instruments is provided internally on that basis to the entity’s key management personnel and the Board. Control and significant influence Determination of whether the Group has control or significant influence over an investee is based on 53 notes to the financial statements 30 June 2010 4. SIGNIFICANT ACCOUNTING JUDGMENTS, ESTIMATES AND ASSUMPTIONS (CONTINUED) the fair value of investment properties may differ and may need to be re-estimated. 5. SEGMENT INFORMATION The Group predominantly operates in Australia. Following are the Group’s operating segments, which are regularly reviewed by the Chief Operating Decision Maker to make decisions about resources allocation and to assess performance: (a) Property: the segment is responsible for the investment in and ownership of commercial, retail and industrial properties. This segment also includes the equity accounting of material co-investments in property trusts not engaged in development and construction projects; (b) Funds Management: the segment includes development, origination and fund management revenues and expenses in addition to discharging the Group’s responsible entity obligations; (c) Property Finance: provides mortgage lending and related property financing solutions; and (d) Joint Venture and Developments: the segment is responsible for the Group’s investment in joint venture development and construction projects, which includes revenue from debt and equity investments in joint ventures. This segment also is responsible for the Group’s investment in property securities. Segment revenue, segment expenses and segment result do not include transactions between operating segments. judgemental assessments of both the rights the Group has in the investee and the risks and rewards it is exposed to (ii) Significant accounting estimates and assumptions Impairment of goodwill and intangibles with indefinite useful lives The Group determines whether goodwill and intangibles with indefinite useful lives are impaired at least on an annual basis. This requires an estimation of the recoverable amount of the cash-generating units to which the goodwill and intangibles with indefinite useful lives are allocated. For goodwill this involves value in use calculations which incorporate a number of key estimates and assumptions around cash flows and fair value of investment properties upon which these determine the revenue / cash flows. No impairment loss was recognised in the current year in respect of goodwill, however, an impairment was recognised for licenses. Fair value of derivatives The fair value of derivatives is determined using closing quoted market prices (where there is an active market) or a suitable pricing model based on discounted cash flow analysis using assumptions supported by observable market rates. Where the derivatives are not quoted in an active market their fair value has been determined using (where available) quoted market inputs and other data relevant to assessing the value of the financial instrument, including financial guarantees granted by the Group, estimates of the probability of exercise. Valuation of investment properties The Group makes judgements in respect of the fair value of investment properties (note 2(o)). The fair value of these properties are reviewed regularly by management with reference to annual external independent property valuations and market conditions existing at reporting date, using generally accepted market practices. The assumptions underlying estimated fair values are those relating to the receipt of contractual rents, expected future market rentals, maintenance requirements, capitalisation rates discount rates that reflect current market uncertaintities and current and recent property investment prices. If there is any material change in these assumptions or regional, national or international economic conditions, 54 abacus property group 5. SEGMENT INFORMATION (CONTINUED) YEAR ENDED 30 JUNE 2010 $’000 $’000 $’000 $’000 $’000 PROPERTY FUNDS MANAGEMENT PROPERTY FINANCE JOINT VENTURES/ DEVELOPMENTS TOTAL Revenue Revenue from external customers Equity accounted investments Net change in fair value of investments derecognised 72,567 6,818 5,670 20,897 (729) 12,607 - 4,433 374 110,504 6,463 - - 1,620 7,290 85,055 (16,405) (9,273) Unallocated revenue Total consolidated revenue Direct costs Allocated costs Unallocated expenses Segment result before fair value adjustments Net change in fair value of investments held at balance date Segment result after fair value adjustments Finance costs including net change in fair value of derivatives Profit before tax and non-controlling interest Income tax expense Net profit for the year add non-controlling interest loss Net profit for the period attributable to members of the Group (18,778) 40,599 59,377 20,168 - (6,458) 12,607 - (1,845) 6,427 - (2,773) 13,710 10,762 3,654 633 124,890 (16,405) (20,349) (633) 87,503 - - (7,097) (25,875) 13,710 10,762 (3,443) 61,628 Assets and Liabilities Segment assets Unallocated assets (a) Total assets Segment liabilities Unallocated liabilities (b) Total liabilities Other segment information: Depreciation and amortisation 891,193 - 253,259 - 87,595 - 195,025 - 8,463 - 10,472 - 1,849 - 1,849 - 3,630 - - - 3,630 (35,969) 25,659 (666) 24,993 443 25,436 1,427,072 78,229 1,505,301 22,633 379,799 402,432 (a)Unallocated assets include goodwill, cash and other assets. (b)Unallocated liabilities include interest-bearing liabilities, tax liabilities and other liabilities. 55 notes to the financial statements 30 June 2010 5. SEGMENT INFORMATION (CONTINUED) YEAR ENDED 30 JUNE 2009 $’000 $’000 $’000 $’000 $’000 PROPERTY FUNDS MANAGEMENT PROPERTY FINANCE JOINT VENTURES/ DEVELOPMENTS TOTAL 356 79,147 645 Revenue Revenue from external customers Equity accounted investments Net change in fair value of investments derecognised during the year Unallocated revenue Total consolidated revenue Direct costs Allocated costs Unallocated expenses Segment result before fair value adjustments Net change in fair value of investments held at balance date Segment result after fair value adjustments Finance costs including net change in fair value of derivatives Loss before tax and non-controlling interest Income tax benefit Net loss for the year less non-controlling interest Net loss for the period attributable to members of the Group - 80,148 (13,437) (7,020) - 59,691 (107,518) (47,827) 14,839 3,195 3,316 - 21,350 - (8,106) - 13,244 14,447 - 9,099 4,961 117,532 8,801 - 7,222 10,894 - 14,447 - (1,560) - 12,887 - 21,282 - (1,562) - 19,720 1,215 138,442 (13,437) (18,248) (1,215) 105,542 - - (5,908) (113,426) 13,244 12,887 13,812 (7,884) (96,284) (104,168) 1,178 (102,990) 578 (102,412) 1,392,879 52,914 1,445,793 27,292 428,774 456,066 896,822 223,371 146,162 126,524 12,614 10,432 2,123 2,123 3,693 - - - 3,693 Assets and Liabilities Segment assets Unallocated assets Total assets Segment liabilities Unallocated liabilities Total liabilities Other segment information: Depreciation and amortisation 56 abacus property group 6. REVENUE (a) Finance income Interest and fee income on secured loans Provision for doubtful debts Bank interest Total finance income (b) Funds Management Income Asset management fees Property management fees Consulting and other income Interest on loans to funds management entities (1) Impairment of loan as part of the restructuring of ADIFII Total funds management income CONSOLIDATED 2010 $’000 2009 $’000 17,592 (285) 633 17,940 5,204 890 1,665 17,316 (4,900) 20,175 22,102 (5,074) 1,215 18,243 5,885 1,039 13,293 10,848 (11,000) 20,065 2010 $’000 2,282 - 56 2,338 - - - - - - PARENT 2009 $’000 1,018 - 31 1,049 - - 715 - - 715 (c) Net change in fair value of investments and financial instruments derecognised Net change in fair value of financial instruments derecognised Net change in fair value of other investments derecognised Total net change in fair value of investments and financial instruments derecognised 3,589 1,585 5,174 (1) No interest was charged on the loan owed by ADIFII in 2009. - 9,110 - 1,549 - 4,824 9,110 1,549 4,824 57 notes to the financial statements 30 June 2010 7. EXPENSES (a) Depreciation, amortisation and impairment expense Depreciation of property, plant and equipment Amortisation of software Impairment of intangible assets Amortisation - leasing costs Total depreciation, amortisation and impairment expense (b) Net change in fair value of derivatives Interest rate swaps Financial instruments (ADIFII guarantee) Total net change in fair value of derivatives (c) Net change in fair value of investments held at balance date Net change in fair value of property securities held at balance date Net change in fair value of options held at balance date Total change in fair value of investments held at balance date 4,100 3,000 7,100 5,908 - 5,908 2010 $’000 PARENT 2009 $’000 CONSOLIDATED 2010 $’000 589 32 3,064 1,043 4,728 2009 $’000 778 31 - 1,185 1,994 5,247 1,000 6,247 48,420 3,000 51,420 (174) 1,000 826 - - - - 883 - 883 493 - 493 - - - - 447 3,000 3,447 5,851 - 5,851 6,969 - 6,969 - - (683) (683) 28,008 1,714 29,722 43,165 1,699 44,864 12,423 - 8,559 20,982 10,240 1,542 7,718 19,500 - - 1,083 1,083 (d) Finance costs Interest on loans Amortisation of finance costs Total finance costs (e) Administrative expenses Wages and salaries Share based payments Other administrative expenses Total administrative expenses 58 abacus property group 8. INCOME TAX (a) Income tax expense The major components of income tax expense are: Income Statement Current income tax CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 Current income tax charge Adjustments in respect of current income tax of previous years (5,781) 2,409 2,216 (41) (243) (2,077) 767 (23) Deferred income tax Movement in depreciable assets tax depreciation Relating to origination and reversal of temporary differences Income tax expense / (benefit) reported in the income statement 578 3,460 666 121 25 15 (3,474) (1,178) 3,766 1,471 (1,625) (866) (b) Numerical reconciliation between aggregate tax expense recognised in the income statement and tax expense calculated per the statutory income tax rate A reconciliation between tax expense and the product of accounting profit before income tax multiplied by the Group’s applicable income tax rate is as follows: Profit / (loss) before income tax expense Prima facie income tax expense / (benefit) calculated at 30% Less prima facie income tax/(benefit) on (profit)/loss from AT and AIT Prima Facie income tax of entities subject to income tax Entertainment Share based payments Foreign exchange translation adjustments Impairment of management rights Adjustment of prior year tax applied Derecognition of deferred tax assets Other items (net) Income tax expense / (benefit) Income tax expense/(benefit) reported in the consolidated income statement 12,602 3,781 (3,720) 61 - - 271 - (2,077) 3,164 52 25,659 7,698 (15,501) (7,803) (11) - (104,168) (31,250) 29,999 (1,251) (11) 463 (55) - (43) - (281) 271 919 2,409 3,605 1,276 666 666 (1,178) 1,471 (1,178) 1,471 28,116 8,435 (9,000) (565) - - (55) - (23) - (223) (866) (866) The Group has income tax losses for which no deferred tax asset is recognised on the balance sheet of gross $3.59 million (2009: Nil), which are available indefinitely for offset against future income gains subject to continuing to meet relevant statutory tests. 59 notes to the financial statements 30 June 2010 8. INCOME TAX (CONTINUED) (c) Recognised deferred tax assets and liabilities Deferred income tax at 30 June 2010 relates to the following: Deferred tax liabilities Revaluation of investment properties to fair value Revaluation of investments to fair value Other Gross deferred income tax liabilities Set off of deferred tax assets Net deferred income tax liabilities Deferred tax assets Revaluation of investment properties to fair value Revaluation of investments to fair value Revaluation of financial instruments to fair value Provisions Losses available for offset against future taxable income Employee provisions Other Gross deferred income tax assets Set off of deferred tax assets Net deferred income tax assets CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 - - 2,557 2,557 (2,273) 284 - - 3,922 3,921 6,761 589 266 15,459 (2,273) 13,186 45 1,767 661 2,473 (2,118) 355 1,165 1,278 958 7,984 1,008 386 668 13,447 (2,118) 11,329 - - 735 735 (735) - - - 37 2,301 4,763 - 28 7,129 (735) 6,394 - - 198 198 (198) - 1,165 807 97 1,401 940 - 71 4,481 (198) 4,283 Unrecognised temporary differences At 30 June 2010, the Group has unrecognised deferred tax assets on capital account in relation to the fair value of investments in listed and unlisted securities ($10.2 million gross), fair value of investment properties ($3.9 million gross) and fair value of investment in options ($3.0 million gross) (2009: $nil). Tax consolidation AGHL and its 100% owned Australian resident subsidiaries have formed a tax consolidated group. AGHL is the head entity of the tax consolidated group. The head entity and the controlled entities in the tax consolidated group continue to account for their own current and deferred tax amounts. The Group has applied the group allocation approach in determining the appropriate amount of current taxes and deferred taxes to allocate to members of the tax consolidated group. The current and deferred tax amounts are measured in a systematic manner that is consistent with the broad principles in AASB 112 Income Taxes. The nature of the tax funding agreement is discussed further on the following page. 60 abacus property group 8. INCOME TAX (CONTINUED) Nature of the tax funding agreement Members of the tax consolidated group have entered into a tax funding agreement. The tax funding agreement requires payments to/from the head entity to be recognised via an inter-entity receivable (payable) which is at call. To the extent that there is a difference between the amount allocated under the tax funding agreement and the allocation under UIG 1052, the head entity accounts for these as equity transactions. The amounts receivable or payable under the tax funding agreement are due upon receipt of the funding advice from the head entity, which is issued as soon as practicable after the end of each financial year. The head entity may also require payment of interim funding amounts to assist with its obligations to pay tax instalments. 9. DISTRIBUTIONS PAID AND PROPOSED CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 (a) Distributions paid during the year June 2009 quarter: 0.75 cents per stapled security (2008: 3.50 cents) September 2009 quarter: Nil (2008: 3.50 cents) December 2009 half: 1.50 cents per stapled security (2008: 1.75 cents) March 2010 quarter: Nil (2009: 1.75 cents) 11,209 - 22,842 - 34,051 22,637 22,677 11,387 13,190 69,891 (b) Distributions proposed and not recognised as a liability* June 2010 half: 1.65 cents per stapled security (2009: 0.75 cents) 29,924 11,209 - - - - - - - - - - - - Distributions were paid from Abacus Trust and Abacus Income Trust (which do not pay tax provided they distribute all their taxable income) hence, there were no franking credits attached. *The final distribution of 1.65 cents per stapled security was declared on 1 July 2010. The distribution was paid on 11 August 2010 for $29.9 million. No provision for the distribution has been recognised in the balance sheet at 30 June 2010 as the distribution had not been declared by the end of the year. (c) Franking credit balance The amount of franking credits available for the subsequent financial year are: Franking account balance as at the beginning of the financial year at 30% (2009: 30%) Prior year tax adjustment 10,303 - 10,303 11,252 10,303 11,252 (949) 10,303 - 10,303 (949) 10,303 61 notes to the financial statements 30 June 2010 10. EARNINGS PER STAPLED SECURITY Basic and diluted earnings / (loss) per stapled security (cents) Reconciliation of earnings used in calculating earnings per stapled security Basic and diluted earnings per stapled security Net profit / (loss) Weighted average number of stapled securities: Weighted average number of stapled securities for basic and diluted earning per share CONSOLIDATED 2010 $’000 1.53 2009 $’000 (11.81) 2010 $’000 0.76 PARENT 2009 $’000 3.34 25,436 (102,412) 12,602 28,982 ’000 ’000 ’000 ’000 1,662,482 867,488 1,662,482 867,488 62 abacus property group 11. CASH AND CASH EQUIVALENTS CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 Reconciliation to Cash Flow Statement For the purposes of the Cash Flow Statement, cash and cash equivalents comprise the following at 30 June 2010: Cash at bank and in hand (i) (i)cash at bank earns interest at floating rates. The carrying amounts of cash and cash equivalents represent fair value. 21,792 9,124 996 275 24,993 (a) Reconciliation of net profit after tax to net cash flows from operations Net profit / (loss) Adjustments for: Depreciation of non-current assets Amortisation of non-current assets Impairment of licences Provision for doubtful debts Forgiveness of loan as part of the restructuring of ADIFII Income distribution Net change in fair value of derivatives Net change in fair value of investment properties held at balance date Net change in fair value of investments held at balance date Net change in fair value of investment properties derecognised Net change in fair value of financial instruments derecognised Increase/(decrease) in payables Decrease/(increase) in receivables and other assets 589 1,074 3,064 285 4,900 - 6,247 18,775 7,100 (2,116) (5,174) 14,216 (9,348) (102,990) 12,602 28,982 778 2,915 - 5,074 11,000 - 51,420 - - - - - (11,990) 826 - - - - - (30,000) 3,447 107,518 - 2,954 5,908 (1,784) (9,110) (13,668) 8,527 883 - (1,549) 226 (521) 5,851 - (4,824) 2,188 (3,620) Net cash from operating activities 64,605 65,588 477 4,978 (b) Non-cash financing and investing activities Disposal of subsidiary by providing a mortgage loan facility - 8,245 - - Disclosure of financing facilities Refer to note 20d. Disclosure of non-cash financing activities Non-cash financing activities include capital raised pursuant to APG’s distribution reinvestment plan. During the year 37.7 million stapled securities were issued with a cash equivalent of $14.3 million. 63 notes to the financial statements 30 June 2010 12. TRADE AND OTHER RECEIVABLES Trade debtors Related party receivables Other debtors Gross receivables Less provision for doubtful debts Total net receivables 13. PROPERTY LOANS AND OTHER FINANCIAL ASSETS (a) Current property loans Secured loans - amortised cost (i) Loans to related parties - amortised cost Interim funding to related funds - amortised cost (ii) Interest receivable on secured loans - amortised cost Interest receivable on interim funding to related funds Provision for doubtful debts (iv) (b) Current other financial assets Investments in securities - listed (fair value) CONSOLIDATED 2010 $’000 2,458 309 7,075 9,842 (1,000) 8,842 2009 $’000 9,556 5,597 7,124 22,277 (184) 22,093 CONSOLIDATED 2010 $’000 2009 $’000 60,633 - 22,753 3,925 900 (1,200) 87,011 51,221 - 51,634 9,273 845 (13,016) 99,957 2010 $’000 692 472 178 1,342 - 1,342 2010 $’000 - 9,902 - - - - 9,902 PARENT 2009 $’000 742 5,504 643 6,889 - 6,889 PARENT 2009 $’000 - 10,851 - - - - 10,851 2,189 2,189 6,187 6,187 2,189 2,189 6,082 6,082 64 abacus property group 13. PROPERTY LOANS AND OTHER FINANCIAL ASSETS (CONTINUED) (c) Non-current property loans Secured loans - amortised cost (i) Interim funding to related funds - amortised cost (ii) (iii) Interest receivable on secured loans - amortised cost Interest receivable on interim funding to related funds Provision for doubtful debts Provision for impairment on loan in relation to restructuring of ADIFII (iv) (d) Non-current other financial assets Investments in securities - unlisted (fair value) Investments in subsidiaries - at cost Investments in joint ventures - at cost Other financial assets (fair value) (v) CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 147,402 157,631 15,015 6,151 (1,000) 148,539 155,999 5,682 4,122 - - 33,617 - 634 - PARENT 2009 $’000 - 31,267 - 216 - - (11,000) - - 325,199 303,342 34,251 31,483 11,666 - - 35,391 47,057 15,804 - - 18,250 34,054 12,291 117,056 14,172 - 143,519 13,020 81,288 19,370 - 113,678 (i) Mortgages are secured by real property assets. The current facilities are scheduled to mature and are expected to be realised on or before 30 June 2011 and the non-current facilities will mature between 1 July 2011 and 18 December 2018. Weighted average interest rate was 9.93% pa as at 30 June 2010 (2009: 10.05%). (ii) Interim funding is provided to other entities outside the Group managed by the responsible entity AFML to enable acquisition of properties ahead of receipt of funds from investors. The loans are unsecured and the rates of interest equal the rate of the respective fund’s distribution. These loans rank equally with other unsecured liabilities and unitholders in the event of winding up. (iii) The loan to Abacus Storage Fund has the same capital growth entitlements as investor equity up until it is repaid. Recoverability of the loan of $92.3m to ADIFII and the loan of $66.4m to the Abacus Hospitality Fund is predicated on the recovery of property valuations to original cost during the next six years. (iv) The movement in the provision reflects the writing off of loans that had been fully provided for in previous periods. (v) APG enters into loans and receivables with associated options that provide for a variety of outcomes including repayment of principal and interest, satisfaction through obtaining interests in equity or property or combinations thereof. At the end of the year, the fair value of the maximum exposure to credit risk in relation to these instruments was $35.4 million (2009: $18 million). 65 notes to the financial statements 30 June 2010 14. PROPERTY, PLANT AND EQUIPMENT Land and buildings At 1 July, net of accumulated depreciation Additions Disposals Revaluations Effect of movements in foreign exchange Depreciation charge for the year At 30 June, net of accumulated depreciation Cost or fair value less costs to sell Accumulated depreciation Net carrying amount at end of period Plant and equipment At 1 July, net of accumulated depreciation Additions Disposals Depreciation charge for the year At 30 June, net of accumulated depreciation Cost or fair value Accumulated depreciation Net carrying amount at end of period Total Current property, plant and equipment (fair value less costs to sell) Non-current property, plant and equipment (cost or fair value) Total net carrying amount of property, plant and equipment Property Hotel properties - Pubs(1) Budget lodge / hostel accommodation Office equipment / furniture and fittings (1) Value of licences are accounted for separately as intangibles (see note 18) 66 CONSOLIDATED 2010 $’000 2009 $’000 31,258 - (979) (706) (53) (310) 29,210 29,210 - 29,210 1,018 182 - (260) 940 1,773 (833) 940 30,150 20,901 9,249 30,150 7,374 20,901 1,875 30,150 30,302 60 - 1,048 179 (331) 31,258 31,258 - 31,258 1,538 149 (193) (476) 1,018 1,591 (573) 1,018 32,276 - 32,276 32,276 6,965 21,694 3,617 32,276 abacus property group 14. PROPERTY, PLANT AND EQUIPMENT (CONTINUED) The Parent does not hold any property, plant and equipment. The current property, plant and equipment represents six (6) properties which are either subject to a sales contract or an active sales campaign. All properties are expected to be sold by 30 June 2011. Property, plant and equipment pledged as security for liabilities Some of the freehold land and buildings are used as security for secured bank debt. 15. INVENTORIES (a) current Hotel supplies Projects - purchase consideration - other costs (b) non-current Projects - purchase consideration - development costs - other costs Total inventories The Parent does not hold any inventory. Inventories are held at the lower of cost and net realisable value. Other costs as described in note 2(z). CONSOLIDATED 2010 $’000 2009 $’000 107 105 58,600 1,469 60,176 5,159 - 5,264 20,941 4,445 5,505 30,891 91,067 - - - - 5,264 67 notes to the financial statements 30 June 2010 16. INVESTMENT PROPERTIES Investment properties held for sale Retail Commercial Industrial Other Total investment properties held for sale CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 52,785 - 38,040 502 91,327 - 26,391 13,640 4,258 44,289 - - - - - - - - - - The investment properties held for sale represent nine (9) properties which are either subject to a sales contract or an active sales campaign. All properties are expected to be sold by 30 June 2011. Investment properties Retail Commercial Industrial Storage Other Total investment properties Total investment properties including held for sale CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 218,204 262,220 82,031 3,500 51,780 617,735 709,062 266,843 283,450 131,233 3,807 23,217 708,550 752,839 - - - - 6,400 6,400 6,400 PARENT 2009 $’000 - - - - 6,450 6,450 6,450 At 30 June 2010, 60% of the property portfolio was subject to external valuation, the remaining 40% was subject to internal valuation. Reconciliation A reconciliation of the carrying amount of investment properties at the beginning and end of the year is as follows: Carrying amount at beginning of the financial period Additions and capital expenditure Fair value adjustments for properties held at balance date Transfers to inventory Disposals Effect of movements in foreign exchange Properties transferred to held for sale Carrying amount at end of the financial year CONSOLIDATED 2010 $’000 708,550 37,488 (18,775) (1,850) (60,595) (45) (47,038) 617,735 2009 $’000 932,440 49,462 (107,517) - (121,764) 218 (44,289) 708,550 2010 $’000 6,450 236 (286) - - - - 6,400 PARENT 2009 $’000 8,280 1,124 (2,954) - - - - 6,450 68 abacus property group 16. INVESTMENT PROPERTIES (CONTINUED) Investment properties are carried at the directors’ determination of fair value and are based on independent valuations. The determination of fair value includes reference to the original acquisition cost together with capital expenditure since acquisition and either the latest full independent valuation, latest independent update or directors’ valuation. Total acquisition costs include incidental costs of acquisition such as property taxes on acquisition, legal and professional fees and other acquisition related costs. Independent valuations of each investment property is conducted annually either in December or June of each year. The key underlying assumptions, on a portfolio basis, contained within the independent and director valuations above are as follows: • A weighted average capitalisation rate for each category is as follows; - Retail – 8.03% (2009: 7.97%) - Commercial – 8.48% (2009: 8.62%) - Industrial – 9.31% (2009: 9.02%) - Other – 7.92% (2009: 7.98%) • The current occupancy rate for the portfolio is 93.2% (2009: 90%) which is not expected to materially change during the period relevant to the valuations (based on a conservative 50% tenant retention rate): • A weighted average rent review for the 12 months to 30 June 2011 of 3.9% (2010: 3.6%) (excludes market reviews and assumes CPI reviews of 3%). The independent and director valuations are based on common valuation methodologies including capitalisation and discounted cash flow approaches, which have regard to recent market sales evidence. Accordingly, the directors’ valuations at 30 June 2010 have regards to market sales evidence in adopting a market valuation for each property including the key assumptions outlined. The majority of the investment properties are used as security for secured bank debt. 69 notes to the financial statements 30 June 2010 17. NON-CURRENT ASSETS - INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD Investment in associates Investment in joint ventures (a) Details of Associates and Joint Ventures (i) Associates NOTES 17(i) 17(ii) CONSOLIDATED 2010 $’000 23,715 103,995 127,710 2009 $’000 23,687 103,782 127,469 Stanright Limited (1) Abacus Storage Fund (2) Abacus Miller Street Trust (3) Abacus Wodonga Fund(2) PRINCIPAL ACTIVITY Property investment Storage facility investment Property investment Property development OWNERSHIP INTEREST CARRYING VALUE 2010 % 40 16 30 15 2009 % 40 15 30 15 2010 $’000 3,275 16,494 2,326 1,620 23,715 2009 $’000 5,108 14,584 1,622 2,373 23,687 (1) A subsidiary of Abacus Group Holdings Limited, the London Trust, has a 40% interest in Stanright Limited, a UK company which holds a 50% interest in Grant Thornton House in the UK. The reporting date for Stanright Limited is 31 March. (2) The subsidiaries of Abacus Group Holdings Limited act as the Responsible Entities of these Funds. (3) Abacus Trust has a 30% interest in the Abacus Miller Street Holdings Trust which owns 50 Miller Street in North Sydney. 70 abacus property group 17. NON-CURRENT ASSETS - INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (CONTINUED) (ii) Joint Ventures (4) PRINCIPAL ACTIVITY Property investment Property development Property investment Abacus Aspley Village Trust Abacus Rosebery Property Trust Fordtrans Pty Ltd (Virginia Park) Hampton Residential Retirement Trust Property development Jigsaw Trust Pakenham Valley Unit Trust The Abacus Colemans Road Trust The Bay Street Brighton Unit Trust (5) The Main Street Pakenham Trust (5) The Mount Druitt Unit Trust The Tulip Unit Trust Willoughby Development Trust Childcare operator Property development Property development Property development Property development Property investment Property development Property development OWNERSHIP INTEREST CARRYING VALUE 2010 % 33 50 50 50 50 50 50 - - 50 50 50 2009 % 33 50 50 50 50 50 50 50 50 50 50 50 2010 $’000 19,068 200 62,409 4,116 9,013 4,806 1,986 - - 402 1,795 200 103,995 2009 $’000 19,332 200 59,041 4,893 7,263 5,360 1,483 3,173 - 934 1,903 200 103,782 (4) The joint venture entities acquire and develop (generally to the subdivision stage) commercial and residential properties intended for resale. (5) The remaining interest in these joint ventures were acquired during the year. The properties are now included in non-current inventories (note 15). (6) There were no impairment losses or contingent liabilities relating to the investment in the associates and joint ventures other than the debt forgiveness on the working capital facility owed by ADIFII. 71 notes to the financial statements 30 June 2010 17. NON-CURRENT ASSETS - INVESTMENTS ACCOUNTED FOR USING THE EQUITY METHOD (CONTINUED) (b) Share of associates and joint ventures’ net profits Revenue Expenses Net profit / (loss) Share of net profit (c) Extract from associates and joint ventures’ balance sheets Current assets Non-current assets Current liabilities Non-current liabilities Net assets Share of net assets 2010 $’000 98,977 (76,411) 22,566 6,463 2010 $’000 129,247 760,615 889,862 (217,782) (299,572) (517,354) 372,508 127,710 CONSOLIDATED 2009 $’000 88,621 (91,954) (3,333) 8,801 2009 $’000 42,065 829,662 871,727 (124,490) (394,064) (518,554) 353,173 127,469 72 abacus property group 18. INTANGIBLE ASSETS AND GOODWILL Goodwill Balance at 1 July Acquisition through business combinations Disposal Balance at 30 June Licences and entitlements At 1 July, net of accumulated amortisation Acquisition Disposal of licences Impairment At 30 June, net of accumulated amortisation Total goodwill and intangibles CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 32,461 - - 32,461 35,090 67 (2,696) 32,461 32,394 - - 32,394 5,764 12 - (3,064) 2,712 35,173 6,049 - (285) - 5,764 38,225 - - - - - 32,394 PARENT 2009 $’000 32,394 - - 32,394 - - - - - 32,394 Description of the Group’s intangible assets and goodwill Goodwill After initial recognition, goodwill acquired in a business combination is measured at cost less any accumulated impairment losses. Goodwill is not amortised but is subject to impairment testing on an annual basis or whenever there is an indication of impairment. Licences and entitlements Licences and entitlements represent intangible assets acquired through the acquisition of certain hotel assets. Licences and entitlements essentially relate to gaming and liquor licence rights attaching to the hotel assets. These intangible assets have been determined to have indefinite useful lives and the cost model is utilised for their measurement. These licences and entitlements have been granted for an indefinite period by the relevant government department. This supports the Group’s assertion that these assets have an indefinite useful life. As these licences and entitlements are an integral part of owning a hotel asset, they are subjected to impairment testing on an annual basis or whenever there is an indication of impairment as part of the annual property valuation and review process of the hotels as a going concern. Impairment losses recognised An impairment loss of $3.1 million was recognised during the year in relation to the licences of two hotels under the property segment, namely the Mariners Lodge Hotel at Batemans Bay NSW and the Forest Lodge Hotel at Glebe NSW. The impairment loss has been recognised in the consolidated income statement in the line item “depreciation, amortisation and impairment expense”. The loss was a result of write down as the carrying amount exceeded the value in use as determined by the external valuation performed as at 30 June 2010. 73 notes to the financial statements 30 June 2010 18. INTANGIBLE ASSETS AND GOODWILL (CONTINUED) Impairment tests for goodwill and intangibles with indefinite useful lives (i) Description of the cash generating units and the other relevant information Goodwill acquired through business combinations and management rights, licences and entitlements have been allocated to two individual cash generating units, each of which is a reportable segment, for impairment testing as follows: • • Funds Management - property / asset management business Property - or specifically the hotel assets Funds Management The recoverable amount of the Funds Management unit has been determined based on a value in use calculation using cash flow projections as at 30 June 2010 covering a five-year period. A post tax discount rate of 9.6% (2009: 10.59%) and a terminal growth rate of 3% (2009: 3%) has been applied to the cash flow projections. Property The recoverable amount of the indefinite life intangible assets have been determined based on the independent and directors’ valuations of the hotels on a going concern basis. Common valuation methodologies including capitalisation and discounted cash flow approaches are used, with assumptions reference to recent market sales evidence. Accordingly, the directors’ valuations at 30 June 2010 have regards to market sales evidence in adopting a market valuation for each property including the key assumptions outlined. (ii) Carrying amounts of goodwill, management rights, licences and entitlements allocated to each of the cash generating units The carrying amounts of goodwill, management rights, licences and entitlements are allocated to Funds Management and Property as follows: Goodwill Management rights, licences and entitlements FUNDS MANAGEMENT 2010 $’000 32,394 2009 $’000 32,394 PROPERTY 2010 $’000 67 2009 $’000 67 2010 $’000 32,461 TOTAL 2009 $’000 32,461 PARENT 2009 $’000 32,394 2010 $’000 32,394 - - 2,712 5,764 2,712 5,764 - - (iii) Key assumptions used in valuation calculations Funds Management Goodwill The calculation of value in use is most sensitive to the following assumptions: a. Fee income b. Discount rates c. Property values of the funds/properties under management Fee income – fee income is based on actual income in the year preceding the start of the budget period and actual funds under management. 74 abacus property group 18. INTANGIBLE ASSETS AND GOODWILL (CONTINUED) (iii) Key assumptions used in valuation calculations (continued) Discount rates – discount rates reflect management’s estimate of the time value of money and the risks specific to each unit that are not reflected in the cash flows. Property values – property values are based on the fair value of properties which are valued annually by independent valuers. Hotel Intangible Assets The calculation of the hotel valuations is most sensitive to the following assumptions: a. Hotel income b. Discount rates and capitalisation rates with reference to market sales evidence c. Other value adding or potential attributes of the hotel asset Hotel income – hotel income is based on actual income in the year preceding the start of the budget period, adjusted based on industry norms for valuation purposes. Discount rates and capitalisation rates – these rates reflect the independent valuers’ and management’s estimate of the time value of money and the risks specific to each unit that are not reflected in the cash flows, with reference to recent market sales evidence. The weighted average capitalisation rate used for the two hotel valuations at June 2010 was 11.65% (2009: 9.42%). Other value adding or potential attributes – unique features of individual hotel assets that will add or have the potential to add value to the property in determining the total fair value of the hotel. (iv) Sensitivity to changes in assumptions Significant and prolonged property value falls and market influences which could increase discount rates could cause goodwill to be impaired in the future, however, the goodwill valuation as at 30 June 2010 has significant head room thus changes in the assumptions such as discount rate and revenue assumptions would not cause any significant impairment. Intangibles have been impaired on the basis that they now represent recoverable amount. A decrease in hotel income or increase in discount rate have already been taken into consideration in the sensitivity of market factors as part of the external valuation. 75 notes to the financial statements 30 June 2010 19. TRADE AND OTHER PAYABLES (a) Current Trade creditors Other creditors Rental guarantee Goods and services tax Accrued expenses (b) Non-current Rental guarantee 20. INTEREST BEARING LOANS AND BORROWINGS (a) Current Bank loans - A$ Other loans - A$ Loan from related parties Less: Unamortised borrowing costs (b) Non-current Bank loans - A$ Loan from related parties Less: Unamortised borrowing costs (c) Maturity profile of current and non-current interest bearing loans Due within one year Due between one and five years Due after five years 76 CONSOLIDATED 2010 $’000 2009 $’000 1,612 3,405 1,313 1,181 5,490 13,001 626 3,279 2,314 1,893 5,160 13,272 4,065 4,065 6,676 6,676 CONSOLIDATED 2010 $’000 2009 $’000 232,157 9,916 141 (1,508) 240,706 62,000 - 510 (681) 61,829 109,734 1,299 (598) 110,435 330,219 - (664) 329,555 242,214 105,048 5,985 353,247 62,510 324,234 5,985 392,729 2010 $’000 207 125 - (30) 93 395 - - 2010 $’000 2,297 - - - 2,297 - 1,299 - 1,299 2,297 1,299 - 3,596 PARENT 2009 $’000 205 52 - (27) 236 466 - - PARENT 2009 $’000 601 - - - 601 2,637 - - 2,637 601 2,637 - 3,238 abacus property group 20. INTEREST BEARING LOANS AND BORROWINGS (CONTINUED) The Group maintains a range of interest-bearing loans and borrowings. The sources of funding are spread over a number of counterparties and the terms of the instruments are negotiated to achieve a balance between capital availability and cost of debt. Bank loans – A$ are provided by several banks at interest rates that include both fixed and floating arrangements. The loans are denominated in Australian dollars and the term to maturity varies from February 2011 to November 2016. The effective fixed interest rate of borrowings which are covered by fixed rate swaps (including bank margins and fees on both drawn and undrawn amounts) was 8.79% at year end (2009 8.06%), while interest on floating rate borrowings are paid quarterly based on existing swap and yield rates quoted on the rate reset date. The bank loans are secured by a charge over the investment properties, certain inventory and certain property, plant and equipment as detailed in note 14 to note 16. Approximately 51.2% (2009: 76.3%) of available bank debt facilities were subject to fixed rate arrangements with a weighted average term to maturity of 6.00 years (2009: 4.69 years). APG’s weighted average interest rate as at 30 June 2010 was 8.00% (2009: 7.31%). 77 notes to the financial statements 30 June 2010 20. INTEREST BEARING LOANS AND BORROWINGS (CONTINUED) (d) Financing facilities available At reporting date, the following financing facilities had been negotiated and were available: Total facilities - bank loans Facilities used at reporting date - bank loans Facilities unused at reporting date - bank loans These facilities comprise fixed and floating rate secured facilities. CONSOLIDATED 2010 $’000 625,892 (341,891) 284,001 2009 $’000 612,442 (392,219) 220,223 2010 $’000 4,200 (2,297) 1,903 PARENT 2009 $’000 5,335 (3,238) 2,097 The Group’s debt facilities are secured first mortgage facilities – they are collateralised by the Group’s real estate assets. Full utilisation of available facilities would require additional real estate assets to collateralise draw downs. Facility readily available at reporting date based upon (a) existing secured property assets and (b) a targeted Group Gearing ratio (Total Debt – Cash / Total Assets – Cash) of between 30% to 35% is $132.7 million. Cash on hand at reporting date is $21.8 million. During the year, the Group has extended the contractual maturity date of the Working Capital Facility, which is part of the Club Facility, from May 2010 to February 2011 (the same date as the Core facility) and the contractual maturity date of the Abacus Independent Retail Property Trust Facility from December 2010 to June 2015. The Club Facility is a secured, limited recourse debt agreement with ANZ (as lead arranger), CBA and St George Bank. Under the agreement certain properties owned by AT, AIT, AGPL and AGHL form a common security pool, which is collateral for this loan facility. Also as part of the extension of the Working Capital Facility, the Group has transferred out $70m of the Working Capital Facility to establish a new three year facility maturing in December 2012. This facility is secured against amounts which are not part of the club collateral pool which enables the Group to access additional liquidity including for future acquisition opportunities. Please also refer to Note 24 Capital Management for more information on key banking covenants of the refinanced and renewed facilities. 21. DERIVATIVES Interest rate swaps Financial instruments (ADIFII guarantee)* *refer to Note 28 for details of the guarantees provided to ADIFII CONSOLIDATED 2010 $’000 26,320 4,000 30,320 2009 $’000 37,035 3,000 40,035 2010 $’000 125 4,000 4,125 PARENT 2009 $’000 313 3,000 3,313 7878 abacus property group 22. FINANCIAL INSTRUMENTS (i) Credit Risk Credit Risk Exposures The Group’s maximum exposure to credit risk at the reporting date was: Receivables Secured property loans Interim funding to related funds Other financial assets (fair value) Cash and cash equivalents CARRYING AMOUNT CONSOLIDATED 2010 $’000 8,842 225,775 186,435 35,392 21,792 478,236 2009 $’000 22,093 219,949 201,600 18,250 9,124 471,016 2010 $’000 1,341 - 44,153 - 996 46,490 PARENT 2009 $’000 6,889 - 42,334 - 275 49,498 As at 30 June 2010, the Group had the following concentrations of credit risk: • • Secured property loans: 76% of secured property loans is represented by 5 borrowers (2009: 69% of secured property loans was represented by 5 borrowers); Interim Funding to Related Funds: represented by the Abacus Diversified Income Fund II (working capital facility and secured note facility) $96.9 million, and the Abacus Hospitality Fund $66.6 million (2009: Abacus Diversified Income Fund II $82.7 million, Abacus Hospitality Fund $70.6 million); and • Other financial assets (fair value) is represented by 2 issuers (2009: 1 issuer). 79 notes to the financial statements 30 June 2010 22. FINANCIAL INSTRUMENTS (CONTINUED) (i) Credit Risk (continued) Secured property loans and interim funding The following table illustrates grouping of the Group’s investment in secured loans and interim funding. As noted in disclosure note 3, the Group mitigates the exposure to this risk by evaluation of the credit submission before acceptance, ensuring security is obtained and consistent and timely monitoring of the financial instrument to identify any potential adverse changes in the credit quality: 30 JUNE 2010 Consolidated less: provisioning Total Consolidated Parent less: provisioning Total Parent TOTAL $’000 414,410 (2,200) 412,210 44,153 - 44,153 ORIGINAL TERM (1) $’000 398,398 (1,000) 397,398 44,153 - 44,153 EXTENDED TERM $’000 2,718 - 2,718 - - - PAST DUE TERM (2) $’000 10,141 - 10,141 - - - IMPAIRED (3) $’000 3,153 (1,200) 1,953 - - - (1) Terms are extended typically in recognition of traditional project delays (e.g. weather, development approvals). (2) For loans with past due terms all are less than two years old. (3) In considering the impairment of loans, the Group will undertake a market analysis of the secured property development which is used to service the loan and identify if a deficiency of security exists and the extent of that deficiency, if any. If there is an indicator of impairment, fair value calculations of expected future cashflows are determined and if there are any differences to the carrying value of the loan, an impairment is recognised. 30 JUNE 2009 Consolidated less: provisioning Total Consolidated Parent less: provisioning Total Parent TOTAL $’000 467,658 (24,016) 443,642 49,223 - 49,223 ORIGINAL TERM $’000 422,905 (12,200) 410,705 49,223 - 49,223 EXTENDED TERM $’000 - - - - - - PAST DUE TERM (1) $’000 28,806 (441) 28,365 - - - IMPAIRED $’000 15,947 (11,375) 4,572 - - - (1) For loans with past due terms all are less than two years old and are expected to be recovered. 8080 abacus property group 22. FINANCIAL INSTRUMENTS (CONTINUED) (i) Credit Risk (continued) Investment in secured property loans are interest bearing on average 2.5 year terms. A provision for impairment loss is typically recognised when there is objective evidence that the loan has not been repaid by the due date and management has determined that the full amount of the loan may not be recoverable. An impairment loss of $1.0 million for interim funding to related funds and a $4.9 million debt forgiveness of the ADIFII loan as part of the restructuring (2009: $5.1 million for secured property loans and $11.0 million impairment for ADIFII) has been recognised by the Group in the current year. The movement in the allowance for impairment in respect of secured property loans and receivables during the year was as follows: Balance at 1 July 2009 Impairment loss recognised (secured property loans) Impairment loss recognised (interim funding) Impairment loss recognised (ADIFII) Impairment loss utilised / written back Balance at 30 June 2010 CONSOLIDATED PARENT 2010 $’000 24,016 - 1,000 4,900 (27,716) 2,200 2009 $’000 8,511 5,099 - 11,000 (594) 24,016 2010 $’000 - - - - - - 2009 $’000 - - - - - - 81 notes to the financial statements 30 June 2010 22. FINANCIAL INSTRUMENTS (CONTINUED) (ii) Liquidity Risk The table below shows an analysis of the contractual maturities of key liabilities which forms part of the Group’s assessment of liquidity risk. CARRYING AMOUNT CONTRACTUAL CASH FLOWS 1 YEAR OR LESS OVER 1 YEAR TO 5 YEARS $’000 $’000 $’000 $’000 OVER 5 YEARS $’000 17,066 17,066 13,001 4,065 - 383,567 427,734 262,258 140,400 25,076 400,633 444,800 275,259 144,465 25,076 CARRYING AMOUNT CONTRACTUAL CASH FLOWS 1 YEAR OR LESS OVER 1 YEAR TO 5 YEARS OVER 5 YEARS $’000 $’000 $’000 $’000 $’000 395 7,721 8,116 395 9,153 9,548 395 5,153 5,548 - 4,000 4,000 CARRYING AMOUNT CONTRACTUAL CASH FLOWS 1 YEAR OR LESS OVER 1 YEAR TO 5 YEARS $’000 $’000 $’000 $’000 - - - OVER 5 YEARS $’000 19,948 19,948 13,272 6,676 - 429,764 587,366 175,126 402,240 10,510 449,712 607,314 188,398 408,916 10,510 CARRYING AMOUNT CONTRACTUAL CASH FLOWS 1 YEAR OR LESS OVER 1 YEAR TO 5 YEARS $’000 $’000 $’000 $’000 466 3,551 4,017 466 5,697 6,163 466 1,694 2,160 - 4,004 4,004 OVER 5 YEARS $’000 - - - CONSOLIDATED 30 JUNE 2010 Liabilities Trade and other payables Interest bearing loans and borrowings incl derivatives# Total liabilities PARENT 30 JUNE 2010 Liabilities Trade and other payables Interest bearing loans and borrowings incl derivatives^ Total liabilities CONSOLIDATED 30 JUNE 2009 Liabilities Trade and other payables Interest bearing loans and borrowings incl derivatives Total liabilities PARENT 30 JUNE 2009 Liabilities Trade and other payables Interest bearing loans and borrowings incl derivatives Total liabilities # Includes derivative of a principal value of $30.3 million. ^ Includes derivative of a principal value of $4.1 million. 8282 abacus property group 22. FINANCIAL INSTRUMENTS (CONTINUED) (iii) Currency Risk There is no significant currency risk related to investments in $NZD and $SGD. The following table shows the currency risk associated to the Group’s investment in options denominated in £GBP. CONSOLIDATED Assets Other financial assets Investment in securities Total assets AUD GBP 2010 $’000 15,391 10,491 25,882 2009 $’000 18,250 13,995 32,245 2010 $’000 8,721 5,944 14,665 2009 $’000 8,891 6,818 15,709 The following sensitivity is based on the foreign risk exposures in existence at the balance sheet date. At 30 June 2010, had the Australian Dollar moved, as illustrated in the table below, with all other variables held constant, post tax profit and equity would have been affected as follows: JUDGEMENTS OF REASONABLY POSSIBLE MOVEMENTS: CONSOLIDATED AUD/GBP + 10% AUD/GBP - 10% POST TAX PROFIT HIGHER/(LOWER) EQUITY HIGHER/(LOWER) 2010 $’000 (2,353) 2,876 2009 $’000 (2,931) 3,583 2010 $’000 - - 2009 $’000 - - 83 notes to the financial statements 30 June 2010 22. FINANCIAL INSTRUMENTS (CONTINUED) (iv) Interest rate risk The Group’s exposure to interest rate risk and the effective weighted average interest rates for each class of financial asset and financial liability are: CONSOLIDATED FLOATING INTEREST RATE FIXED INTEREST MATURING IN 1 YEAR OR LESS FIXED INTEREST MATURING IN 1 TO 5 YEARS FIXED INTEREST MATURING IN OVER 5 YEARS NON INTEREST BEARING TOTAL 30 JUNE 2010 $’000 $’000 $’000 $’000 $’000 $’000 Financial Assets Cash and cash equivalents Receivables Secured and related party loans Total financial assets weighted average interest rate Financial liabilities Interest bearing liabilities - bank Interest bearing liabilities - other Related party loans Derivatives Payables Total financial liabilities Weighted average interest rate* PARENT 30 JUNE 2010 Financial Assets Cash and cash equivalents Receivables Secured and related party loans Total financial assets weighted average interest rate Financial liabilities Interest bearing liabilities - bank Derivatives Payables Total financial liabilities Weighted average interest rate* * Rate calculated at 30 June. 8484 21,792 - - 21,792 4.35% 166,991 9,916 - - - 176,907 7.25% - - 38,858 38,858 12.98% 174,900 - - - - 174,900 8.79% - - 108,273 108,273 12.65% - - 264,127 264,127 8.36% - 8,842 3,153 11,995 21,792 8,842 414,411 445,045 - - - - - - - - - - - - - - 1,440 30,320 17,066 48,826 341,891 9,916 1,440 30,320 17,066 400,633 FLOATING INTEREST RATE FIXED INTEREST MATURING IN 1 YEAR OR LESS FIXED INTEREST MATURING IN 1 TO 5 YEARS FIXED INTEREST MATURING IN OVER 5 YEARS NON INTEREST BEARING TOTAL $’000 $’000 $’000 $’000 $’000 $’000 996 - 17,332 18,328 4.14% 1,122 - - 1,122 7.22% - - 9,902 9,902 15.00% 1,175 - - 1,175 8.79% - - - - - - - - - - 13,079 13,079 15.00% - - - - - 1,341 3,840 5,181 - 4,125 395 4,520 996 1,341 44,153 46,490 2,297 4,125 395 6,817 abacus property group 22. FINANCIAL INSTRUMENTS (CONTINUED) (iv) Interest rate risk (continued) CONSOLIDATED FLOATING INTEREST RATE FIXED INTEREST MATURING IN 1 YEAR OR LESS FIXED INTEREST MATURING IN 1 TO 5 YEARS FIXED INTEREST MATURING IN OVER 5 YEARS NON INTEREST BEARING TOTAL 30 JUNE 2009 $’000 $’000 $’000 $’000 $’000 $’000 Financial Assets Cash and cash equivalents Receivables Secured and related party loans Total financial assets weighted average interest rate Financial liabilities Interest bearing liabilities - bank Interest bearing liabilities - other Related party loans Derivatives Payables Total financial liabilities Weighted average interest rate* PARENT 30 JUNE 2009 Financial Assets Cash and cash equivalents Receivables Secured and related party loans Total financial assets weighted average interest rate Financial liabilities Interest bearing liabilities - bank Derivatives Payables Total financial liabilities Weighted average interest rate* * Rate calculated at 30 June. 9,124 - - 9,124 2.93% 110,430 - - - 110,430 4.71% - - 78,026 78,026 10.75% 49,104 - - - 49,104 8.15% - - 199,344 199,344 10.84% - - 131,476 131,476 8.44% - 22,093 12,703 34,796 9,124 22,093 421,549 452,766 232,686 - - - 232,686 8.11% - - - - - - 510 37,035 22,948 392,220 510 37,035 22,948 60,493 452,713 FLOATING INTEREST RATE FIXED INTEREST MATURING IN 1 YEAR OR LESS FIXED INTEREST MATURING IN 1 TO 5 YEARS FIXED INTEREST MATURING IN OVER 5 YEARS NON INTEREST BEARING TOTAL $’000 $’000 $’000 $’000 $’000 $’000 275 - 27,643 27,918 3.21% 673 - - 673 4.99% - - - - 476 - - 476 8.15% - - 10,851 10,851 15.00% 2,089 - - 2,089 8.15% - - - - - - - - - 6,889 3,840 10,729 275 6,889 42,334 49,498 - 313 3,466 3,779 3,238 313 3,466 7,017 85 notes to the financial statements 30 June 2010 22. FINANCIAL INSTRUMENTS (CONTINUED) (iv) Interest rate risk (continued) Summarised interest rate sensitivity analysis The table below illustrates the potential impact a change in interest rate by +/- 1% would have had on the Group’s profit and equity on a pre-tax basis: CONSOLIDATED 30 JUNE 2010 Financial assets Financial liabilities PARENT 30 JUNE 2010 Financial assets Financial liabilities CONSOLIDATED 30 JUNE 2009 Financial assets Financial liabilities PARENT 30 JUNE 2009 Financial assets Financial liabilities CARRYING AMOUNT FLOATING $’000 21,792 203,227 CARRYING AMOUNT FLOATING $’000 18,328 1,122 CARRYING AMOUNT FLOATING $’000 9,124 147,465 CARRYING AMOUNT FLOATING $’000 27,918 986 AUD -1% +1% PROFIT $’000 (218) (12,972) EQUITY $’000 - - PROFIT $’000 218 10,385 EQUITY $’000 - - AUD -1% +1% PROFIT EQUITY PROFIT EQUITY $’000 (183) (111) $’000 - - $’000 183 87 $’000 - - AUD -1% +1% PROFIT $’000 (91) (10,011) EQUITY $’000 - - PROFIT $’000 91 (8,510) EQUITY $’000 - - AUD -1% +1% PROFIT EQUITY PROFIT EQUITY $’000 (279) (101) $’000 - - $’000 279 86 $’000 - - The analysis for the interest rate sensitivity of financial liabilities includes derivatives. 86 abacus property group 22. FINANCIAL INSTRUMENTS (CONTINUED) (v) Price Risk The Group is exposed to equity securities risk. Equity securities price risk arises from investments in listed and unlisted securities. The key risk variable is the quoted price of the securities, which is influenced by a range of factors, most of which are outside the control of the Group. As a result, the Group does not use financial instruments to manage the price risk exposure on property securities but instead regularly monitors levels of exposure and conducts sensitivity analysis for fluctuations in the quoted securities prices. A fluctuation of 15% in the price of the equity securities would impact the net profit after income tax expense of the Group, with all other variables held constant, by an increase/(decrease) of $1.82 million (2009: $3.7 million). (vi) Fair values The fair value of the Group’s financial assets and liabilities are approximately equal to that of their carrying values. As at 30 June 2010, the Group has adopted the amendment to AASB 7 Financial Instruments: Disclosures which requires the classification of fair value measurements into the following hierarchy: (a) (b) Level 1 Quoted prices (unadjusted) in active market for identical assets or liabilities; Level 2 Inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and (c) Level 3 Inputs for the asset or liability that are not based on observable market data. 87 notes to the financial statements 30 June 2010 22. FINANCIAL INSTRUMENTS (CONTINUED) (vi) Fair values (continued) The following table presents the Group’s assets and liabilities measured and recognised as at fair value at 30 June 2010. Comparative information has not been provided as permitted by the transitional provisions of the new amendments. CONSOLIDATED Current Investment in securities - listed Total current Non-current Investment in securities - unlisted Investment in options Derivative liabilities Total non-current PARENT Current Investment in securities - listed Total current Non-current Investment in securities - unlisted Derivative assets and liabilities Total non-current There were no transfers between Levels 1, 2 and 3 during the year. LEVEL 1 LEVEL 2 LEVEL 3 2010 $’000 2,189 2,189 2010 $’000 - - 2010 $’000 - - - - - - - - (26,320) (26,320) 11,666 35,392 (4,000) 43,058 TOTAL 2010 $’000 2,189 2,189 11,666 35,392 (30,320) 16,738 2,189 2,189 - - - - - - 125 125 - - 2,189 2,189 12,291 (4,000) 8,291 12,291 (3,875) 8,416 88 abacus property group 22. FINANCIAL INSTRUMENTS (CONTINUED) (vi) Fair values (continued) The following table is a reconciliation of the movements in unlisted securities, options and derivatives classified as level 3 for the year ended 30 June 2010. Comparative information has not been provided as permitted by the transitional provisions of the new rules. CONSOLIDATED opening balance as at 30 June 2009 fair value movement through the income statement purchases redemptions closing balance as at 30 June 2010 PARENT opening balance as at 30 June 2009 fair value movement through the income statement purchases redemptions closing balance as at 30 June 2010 Determination of fair value UNLISTED SECURITIES $’000 15,813 (4,083) 11 (75) 11,666 OPTIONS $’000 18,391 (3,000) 20,000 - 35,391 ADIFII DERIVATIVE $’000 (3,000) (1,000) - - (4,000) UNLISTED SECURITIES ADIFII DERIVATIVE $’000 13,020 (731) 77 (75) 12,291 $’000 (3,000) (1,000) - - (4,000) TOTAL $’000 31,204 (8,083) 20,011 (75) 43,057 TOTAL $’000 10,020 (1,731) 77 (75) 8,291 The fair value of listed securities is determined by reference to the quoted bid price of the entity at balance date. The fair value of unlisted securities is determined by reference to the net assets of the underlying entities. The fair value of derivative financial instruments is determined in accordance with generally accepted pricing models by discounting the expected future cash flows at prevailing market interest rates. In determining the fair value of the ADIFII derivative the growth in net operating income, property valuations and the expected rate of conversion from “A Class” to “B Class” units has also been taken into account. The fair value of interest rate swaps is determined using a generally accepted pricing model on a discounted cash flow analysis using assumptions supported by observable market rates. The fair value of the options is determined using generally accepted pricing models including Black-Scholes and adjusted for specific features of the options including share price, underlying net assets and property valuations and prevailing exchange rates. Sensitivity of Level 3 Sensitivities to reasonably possible changes in non-market observable valuation assumptions would not have a material impact on the Group’s reported results. 89 notes to the financial statements 30 June 2010 23. CONTRIBUTED EQUITY (a) Issued stapled securities Stapled securities - securities financed by APG under the ESLP Total contributed equity (b) Movement in stapled securities on issue At 1 July 2009 - treasury units - equity raising - distribution reinvestment plan - less transaction costs Securities on issue at 30 June 2010 CONSOLIDATED 2010 $’000 2009 $’000 1,110,517 - 1,110,517 1,009,577 (22,080) 987,497 CONSOLIDATED 2010 $’000 53,009 - 53,009 PARENT 2009 $’000 47,064 - 47,064 PARENT STAPLED SECURITIES STAPLED SECURITIES NUMBER ‘000 VALUE $’000 NUMBER ‘000 VALUE $’000 1,509,622 - 266,192 37,738 - 1,813,552 987,497 4,720 106,265 14,272 (2,237) 1,110,517 1,509,622 - 266,192 37,738 - 1,813,552 47,064 - 5,240 705 - 53,009 90 abacus property group 24. CAPITAL MANAGEMENT The Group seeks to manage its capital requirements through a mix of debt and equity funding. It also ensures that Group entities comply with capital and distribution requirements of their constitutions and/or trust deeds, the capital requirements of relevant regulatory authorities and continue to operate as going concerns. The Group also protects its equity in assets by taking out insurance. The Group assesses the adequacy of its capital requirements, cost of capital and gearing (i.e. debt/equity mix) as part of its broader strategic plan. In addition to tracking actual against budgeted performance, the Group reviews its capital structure to ensure sufficient funds and financing facilities, on a cost effective basis are available to implement the Group’s strategy that adequate financing facilities are maintained and distributions to members are made within the stated distribution guidance (i.e. paid out of normalised profits). The Group actively manages its capital via the following strategies: issuing new stapled securities, activating its distribution reinvestment plan (presently active at 2.5% discount to VWAP but not underwritten), electing to have the dividend reinvestment plan underwritten, adjusting the amount of distributions paid to members, activating a security buyback program, divesting assets, active management of the Group’s fixed rate swaps, directly purchasing assets in managed funds or (where practical) recalibrating the timing of transactions and capital expenditure so as to avoid a concentration of net cash outflows. On 26 August 2010 the Group re-financed its $480m CLUB facilities with a new 3 year $400 million syndicated bank debt facility (which replaced Abacus’ existing $400 million core facility maturing in February 2011) and a renewed 3 year $80 million working capital bank debt facility with ANZ (which also had a February 2011 maturity). A summary of the Group’s key banking covenants both at year end and post year end are set out below: COVENANT / RATIO Nature of facilities ICR Group ICR Total Gearing COVENANT REQUIREMENT– AS AT 30 JUNE 2010 Secured, non recourse 1 COVENANT REQUIREMENT– POST REFINANCING Secured, non recourse 1 KEY DETAILS The Group has no unsecured facilities Net rental income / Interest expense (including fixed rate swaps) Group EBITDA (ex fair value P&L) / Total Interest Expense (including fixed rate swaps) 1.5 2.0 50% Total Liabilities (net of cash) / Total Tangible Assets (net of cash) 1.5 2.0 45% LVR 50% to 65% 2 50% to 65% 2 Drawn Loan / Bank accepted valuations Gearing ratio on a look through basis 60% 60% Total Gearing plus gearing from proportional consolidation of equity accounted investments (1) There are no market cap covenants. (2) The 65% LVR for the new Working Capital Facility is maintained but will step down to 62.5% from 1 July 2011 and to 60.0% from 1 July 2012. (3) The weighted average maturity of the Group’s bank facilities increased from 1.3 years to 3.1 years with the refinancing of the CLUB facilities. Total .......bank facilities remains unchanged at $625.9 million. 91 notes to the financial statements 30 June 2010 25. RELATED PARTY DISCOSURES (a) Subsidiaries The consolidated financial statements include the financial statements of the following entities: EQUITY INTEREST CARRYING VALUE ENTITY Abacus Group Holdings Limited and its subsidiaries 2010 % 2009 % Abacus AAVT Pty Ltd Abacus Airways NZ Trust Abacus Bankstown Property Trust Abacus CIH Pty Ltd Abacus Dry Dock Lodge Abacus Finance Pty Limited Abacus Forrest Lodge Trust Abacus Funds Management Limited Abacus HP Operating Co Pty Ltd Abacus HP Trust Abacus Jigsaw Investments Pty Ltd Abacus London Trust Abacus Mariners Lodge Trust Abacus Mortgage Fund Abacus Mount Druitt Trust Abacus Musswellbrook Pty Ltd Abacus Nominee Services Pty Limited Abacus Nominees (No 5) Pty Limited Abacus Nominees (No 7) Pty Limited Abacus Nominees (No 9) Pty Limited Abacus Note Facilities Pty Ltd Abacus Pitt Street Property Trust Abacus Property Income Fund Abacus Property Services Pty Ltd Abacus SP Note Facility Pty Ltd Abacus Storage Funds Management Limited Abacus Unitel Pty Ltd Abacus Unitel Trust Abacus 343 George St Trust Abacus (343 George St) Trust Abacus (343 George St Sydney) Pty Ltd Amiga Pty Limited Childcare Trust 2 Main Street Pakenham Unit Trust Bay Street Brighton Unit Trust Clarendon Property Investments Pty Ltd Corporate Helpers Pty Ltd 92 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - - - 100 100 - - - - 2010 $’000 - 4,750 - - - - - 2009 $’000 - 4,750 - - - - - 8,448 8,448 - - 90 - - - - 90 - - 17,500 908 17,500 908 - - - - - - 21,320 37,725 10 - 929 - 11,867 30,000 30,000 - - - - 5,767 - - - - - - - - 41,796 37,725 10 - 929 - 11,867 - - - - - - - - - abacus property group 25. RELATED PARTY DISCOSURES (CONTINUED) (a) Subsidiaries (continued) ENTITY Abacus Group Projects Limited and its subsidiaries EQUITY INTEREST CARRYING VALUE 2010 % 2009 % 2010 $’000 2009 $’000 Abacus Property Pty Ltd Abacus Allara Street Trust Abacus Jigsaw Holdings Pty Limited Abacus Northshore Trust 1 Abacus Northshore Trust 2 Abacus Repository Trust Abacus Sanctuary Holdings Pty Limited Abacus Ventures Trust Abacus Trust and its subsidiaries Abacus 1769 Hume Highway Trust Abacus Alderley Trust Abacus Alexandria Trust Abacus Ashfield Mall Property Trust Abacus Campbell Property Trust Abacus Epping Park Property Trust Abacus Greenacre Trust Abacus Hurstville Trust Abacus Industrial Property Trust Abacus Lisarow Trust Abacus Liverpool Plaza Trust Abacus Macquarie Street Trust Abacus Moorabbin Trust Abacus Moore Street Trust Abacus National Boulevard Trust Abacus North Sydney Car park Trust Abacus Port Macquarie Trust Abacus Premier Parking Trust Abacus Shopping Centre Trust Abacus Smeaton Grange Trust Abacus SP Fund Abacus St Johns Road Trust Abacus Varsity Lakes Trust Abacus Virginia Trust Abacus Westpac House Trust 100 50 50 50 50 50 50 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 100 - 100 100 100 100 100 100 100 100 100 50 50 50 50 50 50 51 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 - 500 - - - - - - 500 - - - - - 2,414 9,163 13,803 17,731 462 50,464 17,799 22,401 12,683 12,493 10,024 8,204 33,116 2,946 31,176 1,469 - 2,229 - 3,785 - 5,916 28,192 - 14,107 58,365 52,327 14,803 19,587 1,600 57,908 15,044 29,547 13,396 14,314 8,902 8,204 34,249 3,154 31,295 1,319 16,091 1,463 10,077 7,010 - 5,803 - 4,316 15,021 58,365 44,419 93 notes to the financial statements 30 June 2010 25. RELATED PARTY DISCOSURES (CONTINUED) (a) Subsidiaries (continued) ENTITY Abacus Income Trust and its subsidiaries Abacus Campbellfield Trust Abacus Chermside Trust Abacus Eagle Farm Trust Abacus Independent Retail Property Trust Abacus Lennons Plaza Trust Abacus Mertz Apartments Abacus Retail Property Trust Abacus Stafford Trust Abacus Tamworth Retail Trust Abacus Wollongong Property Trust (b) Ultimate parent AGHL has been designated as the parent entity of the Group. (c) Key Management Personnel Details of key management personnel are disclosed in Note 26. EQUITY INTEREST CARRYING VALUE 2010 % 100 100 100 75 100 100 100 100 100 100 2009 % 100 100 100 75 100 100 100 100 100 100 2010 $’000 7,615 - 5,082 24,747 32,679 5,746 - 5,097 10,190 5,348 2009 $’000 8,816 - 5,082 25,964 32,679 6,859 - 5,097 11,951 6,160 94 abacus property group 25. RELATED PARTY DISCOSURES (CONTINUED) (d) Transactions with related parties Transactions with related parties other than associates and joint ventures Revenues Distributions received / receivable from controlled entities Asset management fees received / receivable Property management fees received / receivable Interest revenue from related funds Other transactions Current tax payable assumed from wholly-owned tax consolidation parties Capital tax losses assumed from wholly-owned tax consolidation parties Loan advanced from controlled entities Loan repayments to controlled entities Loan received from entities within the Group Loan repayments from entities within the Group Transactions with associates and joint ventures Revenues Management fees received / receivables from joint ventures Management fees received / receivables from associates Distributions received / receivable from associates Distributions received / receivable from joint ventures Interest revenue from associates Interest revenue from joint ventures CONSOLIDATED 2010 $’000 2009 $’000 2010 $’000 PARENT 2009 $’000 - 2,954 890 11,192 - 12,000 30,000 5,218 1,044 5,164 - - - - - - - - - - - - - - - - - - 240 641 2,176 - 4,186 6,583 2,311 - - 7,322 3,338 1,559 (9,965) (7,203) 13,762 6,639 86,558 122,699 (78,357) (66,400) - - - - - - - 68,574 (120,769) - - - - - 315 949 95 notes to the financial statements 30 June 2010 25. RELATED PARTY DISCOSURES (CONTINUED) (d) Transactions with related parties (continued) Other transactions Loan advanced to associates Loan advanced from associates Loan repayments from associates Loan repayments to associates Loan advanced to joint ventures Loan repayments from joint ventures Loan advanced from joint ventures Loan repayments to joint ventures Interest expense on loan from joint ventures Purchase of unlisted securities Sale of units in subsidiary (7,653) - 2,534 (369) (5,757) 6,704 1,299 - - - - (498) 562 - (9,956) (14,299) 9,260 - (47,104) - (19,336) 8,245 - - - - - - - (5,757) (13,949) 6,704 1,299 - - - - 372 - (4,854) - - - Terms and conditions of transactions Sales and fees to and purchases and fees charged from related parties are made in arm’s length transactions both at normal market prices and on normal commercial terms. Outstanding balances at year-end are unsecured and settlement occurs in cash. No provision for doubtful debts has been recognised or bad debts incurred with respect to amounts payable or receivable from related parties during the year. An impairment of $15.9 million was recognised by the Group as part of the restructuring of ADIFII. Guarantees provided to Joint Venture project related parties are disclosed in Note 28. (e) Director-related entity transactions A director, Mr Dennis Bluth, is a partner in the legal firm HWL Ebsworth and during the year a total amount of $0.1 million (2009: $0.2 million) was paid to the firm for legal services relating to corporate issues, lease documentation and sales contracts. 96 abacus property group 26. KEY MANAGEMENT PERSONNEL (a) Compensation for Key Management Personnel Short-term employee benefits Post-employment benefits Other long-term benefits Security-based payments (b) Security holdings of Key Management Personnel Securities held in Abacus Property Group (number) 30 JUNE 10 Directors J Thame F Wolf W Bartlett D Bastian D Bluth M Irving L Lloyd Executives R de Aboitiz T Hardwick P Strain E Varejes Total CONSOLIDATED PARENT 2010 $ 6,217,280 326,187 44,508 - 6,587,975 2009 $ 4,208,148 592,483 44,165 1,289,742 6,134,538 2010 $ - - - - 2009 $ - - - - BALANCE 1 JULY 09 PURCHASES /(SALES) BALANCE 30 JUNE 10 200,756 14,073,226 16,000 5,000,000 286,953 80,651 55,925 76,064 114,096 98,032 500,000 55,349 42,899 - 276,820 14,187,322 114,032 5,500,000 342,302 123,550 55,925 383,237 100,000 100,000 309,875 20,606,623 52,696 (100,000) 50,701 - 889,837 435,933 - 150,701 309,875 21,496,460 97 notes to the financial statements 30 June 2010 26. KEY MANAGEMENT PERSONNEL (CONTINUED) (b) Security holdings of Key Management Personnel (continued) Securities held in Abacus Property Group (number) (continued) 30 JUNE 09 Directors J Thame F Wolf W Bartlett D Bastian D Bluth M Irving L Lloyd Executives R de Aboitiz T Hardwick J L’Estrange P Strain E Varejes Total BALANCE 1 JULY 08 DISPOSED VIA ESLP PURCHASES / (SALES) BALANCE 30 JUNE 09 55,378 9,718,338 8,000 4,503,497 20,000 35,387 790,925 - (2,881,725) - - - - (785,925) 654,938 1,750,000 1,309,875 654,938 1,309,875 20,811,151 (654,938) (1,700,000) (1,309,875) (654,938) (1,309,875) (9,297,276) 145,378 7,236,613 8,000 496,503 266,953 45,264 50,925 383,237 50,000 - 100,000 309,875 9,092,748 200,756 14,073,226 16,000 5,000,000 286,953 80,651 55,925 383,237 100,000 - 100,000 309,875 20,606,623 All equity transactions with key management personnel other than those arising from the exercise of remuneration options have been entered into under terms and conditions no more favourable than those the Group would have adopted if dealing at arm’s length. (c) Loans to Key Management Personnel There were no loans to individuals that exceeded $100,000 at any time in 2010 or in the prior year. 98 abacus property group 26. KEY MANAGEMENT PERSONNEL (CONTINUED) (d) Other transactions and balances with Key Management Personnel and their related parties During the financial year, transactions occur between the Group and Key Management Personnel which are within normal employee, customer or supplier relationship on terms and conditions no more favourable to than those with which it is reasonable to expect the entity would have adopted if dealing with Key Management Personnel or director- related entity at arm’s length in similar circumstances including, for example, performance of contracts of employment, the reimbursement of expenses and the payment of distributions on their stapled securities in the Group and on their investment in various Trusts managed by Abacus Funds Management Limited as Responsible Entity. An executive, Tom Hardwick, has a 20% interest in the issued capital of Redstone (NSW) Pty Ltd which owns CCG1 Pty Limited, the operator of childcare centres. During the year the Group lent $0.97 million to CCG1 Pty Limited and the balance at 30 June 2010 was $23.16 million. Interest of $2.48 million has been charged on the loan for the year. Amounts recognised at the reporting date in relation to other transactions with Key Management Personnel: Assets Current assets Trade and other receivables Non-current assets Mortgage loans Total Assets Revenue 2010 $’000 2009 $’000 147 1,040 23,158 23,305 2,480 19,081 20,121 3,405 99 notes to the financial statements 30 June 2010 27. SECURITY BASED PAYMENT PLANS (a) Recognised security payment expenses The expense recognised for employee services received during the year is as follows: Expense arising from equity-settled payment transactions CONSOLIDATED 2009 2010 $’000 $’000 - 1,542 2010 $’000 - PARENT 2009 $’000 - The security-based payment plans that were cancelled effective 30 June 2009 are described below. (b) Types of security-based payment plans Executive Performance Award Plan (EPAP) Security options were granted to executives employed on or before the first day of the relevant financial year. Under the EPAP, the exercise price of the options was set by reference to the market price of the securities near the time of each annual grant and performance is measured by comparing the Group’s Total Securityholder Return (TSR) (security price appreciation plus distributions reinvested) with a group of peer companies. The performance measurement period was three years. The cancellation of the EPAP on 30 June 2009 resulted in the bringing forward of any remaining share based payment expenses to that year. The EPAP is no longer in operation and ceased on 30 June 2009. Executive Security Loan Plan (ESLP) Executives were offered limited recourse loans to acquire Group securities on market. The Executive entered into a salary sacrifice arrangement under which base remuneration approximately equal to a notional interest amount on the loan was foregone by the Executive. The interest rate for a financial year was equivalent to the Group distribution rate for that year. The securities acquired under the Plan were purchased on market and were fully vested. The loans were to be repaid with the proceeds of securities that were acquired under the ESLP. This plan was accounted for and valued as an option plan, with the contractual life of each option equivalent to the estimated loan life. The repayment of the loans was treated as an increase to Contributed Equity. The ESLP is no longer in operation and ceased on 30 June 2009. 100 abacus property group 27. SECURITY BASED PAYMENT PLANS (CONTINUED) (c) Summary of options The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, security options: Outstanding at the beginning of the year Forfeited during the year Cancellation of the plans Outstanding at the end of the year Exercisable at the end of the year 28. COMMITMENTS AND CONTINGENCIES 2010 No. - - - - - 2010 WAEP - - - - - 2009 No. 23,180,139 (584,458) (22,595,681) - - 2009 WAEP 1.87 1.81 1.87 - - The Group has provided the following guarantees to the Abacus Diversified Income Fund II (“ADIFII” or the “Fund”): UNIT TYPE Existing Units $1.00 (Class A) Converted Units $1.00 (Class B) New Units $0.75 (Class C) CASH DISTRIBUTION YIELD GUARANTEE 8.5% pa until 30 June 2011 and based on the actual distributable cash of the Fund thereafter. 8.5% pa until 30 June 2011 and 8.0% pa plus indexation thereafter (indexed in line with inflation in each year after 1 July 2011) over the Fund term (30 June 2016) Initially 8.0% pa based on an issue price of $0.75 per Unit, indexed in line with inflation each year from 1 July 2010, over the Fund term (30 June 2016) CAPITAL RETURN GUARANTEE $1.00 per unit at 30 September 2013 if the net assets per Unit are less than $1.00 at 30 June 2013. $1.00 per Unit at Fund termination (effective on 30 June 2016). $0.75 per Unit at Fund termination (effective on 30 June 2016). The Underwritten Distributions will be achieved by deferring the interest on the Working Capital Facility or by deferring any of the fees payable to the Group under the constitution of ADIFII (or a combination of these things) or in any other way the Group considers appropriate. Any interest or fee deferral or other funding support may be recovered if the actual cash distribution exceeds the cash required to meet the underwritten distribution at the expiration of the Fund term or on a winding up of the Fund. The Underwritten Capital Return will apply to all ADIFII units on issue as at 1 July 2013 (Class A) on or after 1 July 2016 (Class B and C). At the time the Group will make an offer to acquire each Class A unit for $1.00, or ensure that each holder of Class B units receives back their $1.00 initial capital and each holder of Class C units receives back their $0.75 initial capital. The Underwritten Capital returns can be satisfied at the Group’s discretion (Class A) or unitholder discretion with respect to Class B and C units through either a payment in cash or by the Group issuing stapled securities in APG to an equivalent value based on the 10 day volume weighted average price of APG’s stapled securities over the period ending on 30 June 2013 or prior to issuing stapled securities as applicable. After 30 June 2016 the Group will, if required, set off all or part of the principal of the second secured Working Capital Facility provided to ADIFII in satisfaction of the Group’s obligations in respect of the Underwritten Capital Return. 28. COMMITMENTS AND CONTINGENCIES (CONTINUED) 101 notes to the financial statements 30 June 2010 The fair value of these guarantees at 30 June 2010 has been determined, a liability has been recognised and the movement has been taken up as a charge in the Income Statement. APG has a series of Funds for which it acts as responsible entity and Manager. Typically, APG provides working capital loans to these Funds to finance seed capital and seeks to make them self-funding through a combination of bank debt and equity. From time to time, APG provides additional funding to these Funds, via these working capital loans, which are used by the Funds for working capital purposes or asset purchases. Certain of these funds are presently in the process of refinancing current banking facilities and there may be consequential working capital loans provided to the Funds for which APG would obtain security. Certain of the working capital loans have a right of redraw for amounts previously repaid, which at 30 June 2010, totalled $24.1 million (2009: $22.6 million). There has been no other material change to any contingent liabilities or contingent assets. Operating lease commitments – Group as lessee The Group has entered into a commercial lease on its offices. The lease has a term of three years with an option to renew for another three years. Future minimum rentals payable under non-cancelable operating lease as at 30 June are as follows: Within one year After one year but not more than five years More than five years CONSOLIDATED PARENT 2010 $’000 744 747 - 1,491 2009 $’000 741 1,491 - 2,232 2010 $’000 - - - - 2009 $’000 - - - - Operating lease commitments – Group as lessor Future minimum rentals receivable under non-cancelable operating leases as at 30 June are as follows: Within one year After one year but not more than five years More than five years CONSOLIDATED PARENT 2010 $’000 54,282 99,945 118,317 272,544 2009 $’000 66,748 131,601 146,512 344,861 2010 $’000 259 289 - 548 2009 $’000 334 558 20 912 These amounts do not include percentage rentals which may become receivable under certain leases on the basis of retail sales in excess of stipulated minimums and, in addition, do not include recovery of outgoings. 102 abacus property group 28. COMMITMENTS AND CONTINGENCIES (CONTINUED) Capital and Other commitments At 30 June 2010 the Group had numerous commitments and contingent liabilities which principally related to property acquisition settlements, loan facility guarantees for the Group’s interest in the jointly controlled projects and funds management vehicles, commitments relating to property refurbishing costs, unused mortgage loan facilities to third parties, and certain property put option arrangements. Commitments contracted for and other contingent liabilities at reporting date but not recognised as liabilities are as follows: Within one year - gross settlement of property acquisitions(1) - property refurbishment costs - unused portion of loan facilities to outside parties After one year but not more than five years - other CONSOLIDATED 2010 $’000 42,000 2,050 2,523 46,573 2009 $’000 49,500 1,820 5,544 56,864 22,500 69,073 1,535 58,399 2010 $’000 PARENT 2009 $’000 - - - - - - - - - - - - (1)Gross settlement of property acquisition commitments excludes bank debt or other external funding available to settle the transactions. In accordance with Group policy, the fair value of all guarantees are estimated each period and form part of the Group’s reported AIFRS results. There has been no other material change to any contingent liabilities or contingent assets. 103 notes to the financial statements 30 June 2010 29. AUDITOR’S REMUNERATION The auditor of the Group is Ernst & Young. Amounts received or due and receivable by Ernst & Young Australia for: - an audit of the financial report of the entity and any other entity in the consolidated entity - other assurance and compliance services CONSOLIDATED 2010 $ 2009 $ 2010 $ PARENT 2009 $ 550,000 37,000 587,000 456,000 34,500 490,500 62,500 - 62,500 135,000 - 135,000 30. EVENTS AFTER THE BALANCE SHEET DATE On 26 July 2010 the Group entered into a conditional agreement with the Kirsh Group to acquire Birkenhead Point Shopping Centre and Marina, Drummoyne, NSW (the Centre) for a total consideration of $174 million as equal tenants in common. Settlement is anticipated to occur in late 2010 with $45 million of the purchase price made available by the vendor as interest-free vendor finance for a period of 3 years. On 23 August 2010 the Group accepted an offer to purchase 343 George St for $78 million. Settlement is anticipated to occur in September 2010. Other than as disclosed above or in note 24 (Group re-financing) in this report and to the knowledge of directors, there has been no other matter or circumstance that has arisen since the end of the financial year that has or may affect the Group’s operations in future financial years, the results of those operations or the Group’s state of affairs in future financial years. 104 abacus property group DIRECTORS’ DECLARATION In accordance with a resolution of the Directors of Abacus Group Holdings Limited, we state that: In the opinion of the directors: (a) the financial statements, notes and the additional disclosures included in the directors’ report designated as audited, of the company and of the consolidated entity are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the company’s and consolidated entity’s financial position as at 30 June 2010 and of their performance for the year ended on that date; and (ii) complying with Accounting Standards and the Corporations Regulations 2001; and (b) the financial report also complies with International Financial Reporting Standards as disclosed in Note 2(b); and (c) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. This declaration has been made after receiving the declarations required to be made to the directors in accordance with sections 295A of the Corporations Act 2001 for the financial year ended 30 June 2010. On behalf of the Board John Thame Chairman Sydney, 27 August 2010 Frank Wolf Managing Director 105 directors’ declaration 30 June 2010 106 106 107 corporate governance report CORPORATE GOVERNANCE REPORT This report sets out the Group’s position relating to each of the ASX Corporate Governance Council Principles of Good Corporate Governance during the year. Additional information, including charters and policies, is available through a dedicated corporate governance information section on the Abacus website at www.abacusproperty.com.au under ‘About Abacus’. PRINCIPLE 1: LAY SOLID FOUNDATIONS FOR MANAGEMENT AND OVERSIGHT Recommendation 1.1 The Board has adopted a charter that sets out the functions and responsibilities reserved by the Board, those delegated to the Managing Director and those specific to the Chairman. The conduct of the Board is also governed by the Constitution. The roles of Chairman and Managing Director are not exercised by the same individual. The primary responsibilities of the Board and the Managing Director are set out in the Board Charter. Senior executives reporting to the Managing Director have their roles and responsibilities defined in position descriptions and are given a letter of appointment on commencement. PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE Recommendation 2.1 The board is comprised of two executive directors and five non-executive directors. The majority of the Board (Messrs Thame, Bluth, Irving, Bastian and Bartlett) are independent members. The board has determined that an independent director is one who: • • is not a substantial security holder or an officer of, or is not otherwise associated directly with, a substantial security holder of the Group; is not employed, or has not previously been employed in an executive capacity by the company or another group member, unless there has been a period of at least three years between ceasing such employment and serving on the board; • has not within the last three years been a principal of a material professional adviser or a material consultant to the Group; or an employee materially associated with the service provided; • is not a material supplier or customer of the Group, or an officer of or otherwise associated directly or indirectly with a material supplier or customer; or The Board Charter and Constitution are available on the Abacus website. • does not have a material contractual relationship with the Group other than as a director. Recommendation 1.2 Each year the Board, with the assistance of the Managing Director, and the Nomination and Remuneration Committee, undertakes a formal process of reviewing the performance of senior executives. The measures generally relate to the performance of Abacus and the performance of the executive individually. The Managing Director is not present at the Board or Nomination and Remuneration Committee meetings when his own remuneration and performance is being considered. Given the nature of the Group’s business and current stage of development, the Board considers its current composition provides the necessary skills and experience to ensure a proper understanding of, and competence to deal with, the current and emerging issues of the business to optimise the financial performance of the Group and returns to securityholders. Details of the skills, experience and expertise of each director are set out on pages 7 and 8. Directors’ independent advice Directors may seek independent professional advice on any matter connected with the performance of their duties. In such cases, the Group will reimburse the reasonable costs of such advice. 108 corporate governance report abacus property group PRINCIPLE 2: STRUCTURE THE BOARD TO ADD VALUE (CONTINUED) Recommendation 2.2 The Chairman of the Board (Mr John Thame) is an independent, non-executive director. Recommendation 2.3 The roles of Chairman and Chief Executive Officer/ Managing Director are not exercised by the same individual. The division of responsibility between the Chairman and Managing Director has been agreed by the Board and is set out in the Board Charter. The Managing Director may not go on to become Chairman. Recommendation 2.4 The Board has established a Nomination and Remuneration committee. The Committee’s charter sets its role, responsibilities and membership requirements. The members of the committee and their attendance at meetings are provided on page 9 of the annual report. The Chairman of the committee is independent. The Selection and Appointment of Non-Executive Directors policy sets out the procedures followed when considering the appointment of new directors. The Nomination and Remuneration Committee Charter and the Selection and Appointment of Non-Executive Directors Policy are available on the website. Recommendation 2.5 The Board has a documented Performance Evaluation Policy which outlines the process for evaluating the performance of the board, its committees and individual directors. An annual review has taken place in the reporting period in accordance with the policy. PRINCIPLE 3: PROMOTE ETHICAL AND RESPONSIBLE DECISION-MAKING Recommendation 3.1 The Group’s Code of Conduct promotes ethical practices and responsible decision making by directors and employees. The Code deals with confidentiality of information, protection of company assets, disclosure of potential conflicts of interest and compliance with laws and regulations. The Code of Conduct is available on the website. Recommendation 3.2 The Group Trading Policy restricts trading in Group securities by directors and employees. The policy sets out the periods in which trading in Group securities is permitted. The Trading Policy is available on the website. PRINCIPLE 4: SAFEGUARD INTEGRITY IN FINANCIAL REPORTING Recommendation 4.1, 4.2 and 4.3 The board has established an Audit and Risk Committee. The Audit and Risk Committee comprises three independent non-executive directors and the chairman of the Committee is not the chairman of the Board. The members of the committee and their attendance at meetings are provided on page 9. Other directors that are not members of the committee, the external auditor and other senior executives attend meetings by invitation. The Audit and Risk Committee has a formal charter which sets out its specific roles and responsibilities, and composition requirements. The procedures for the selection and appointment of the external auditor are set out in the Audit and Risk Committee Charter. The Audit and Risk Committee Charter is available on the website. PRINCIPLE 5: MAKE TIMELY AND BALANCED DISCLOSURE Recommendation 5.1 The Group has a policy and procedures designed to ensure compliance with ASX Listing Rule disclosure requirements. The Managing Director is responsible for ensuring that the Group complies with its disclosure obligations. The Continuous Disclosure and Shareholder Communications Policy is available on the website. 109 corporate governance report Recommendation 7.3 The Managing Director and Chief Financial Officer confirm in writing to the Board that the financial statements present a true and fair view and that this statement is based on a sound system of risk management and internal compliance. The statement also confirms that the statement is founded on a sound system of risk management and internal control and that the system is operating effectively in all material respects in relation to financial reporting risks. PRINCIPLE 8: ENCOURAGE ENHANCED PERFORMANCE Recommendation 8.1 The board has established a Nomination and Remuneration Committee. The Nomination and Remuneration Committee is responsible for assessing the processes for evaluating the performance of the Board and key executives. A copy of the committee charter is available on the website. The Chairman of the Nomination and Remuneration Committee is independent. The Group’s remuneration policies including security- based payment plans and the remuneration of key management personnel are discussed in the Remuneration Report. The remuneration committee may seek input from individuals on remuneration policies but no individual is directly involved in deciding their own remuneration. The members of the committee and their attendance at meetings are provided on page 9. Non-executive directors are paid fees for their service and do not participate in other benefits which may be offered other than those which are statutory requirements. PRINCIPLE 6: RESPECT THE RIGHTS OF SECURITYHOLDERS Recommendation 6.1 The Group aims to keep securityholders informed of significant developments and activities of the Group. The Group’s website is updated regularly and includes annual and half-yearly reports, distribution history and all other announcements lodged with the ASX. The Continuous Disclosure and Shareholder Communications Policy is available on the website. In addition, the Group publishes a newsletter from time to time which updates investors and their advisers on the current activities of the Group. External auditor The external auditor attends the annual general meetings of the Group and is available to answer securityholder questions. PRINCIPLE 7: RECOGNISE AND MANAGE RISK Recommendation 7.1 and 7.2 The Business Risk Management Policy dealing with oversight and management of material business risks is set out in the corporate governance information section on the Abacus website at www.abacusproperty.com.au. The Group’s Risk Management Framework was developed in consultation with an external consultant. Under the compliance plan the responsible managers report regularly on the risks they manage and any emerging risks. An Internal Auditor (independent of the external auditor) has been appointed who reviews business processes and undertakes formal assessments throughout the year. These assessments are provided to the Audit and Risk Committee for review. The Audit and Risk Committee has responsibility for reviewing the Group’s risk management framework. The risk management framework is formally reviewed annually. This review is initially carried out by the Compliance and Risk Manager and then reviewed by the Audit and Risk Committee and the Board to assess any necessary changes. 110 110 ASX additional information ASX ADDITIONAL INFORMATION Abacus Property Group is made up of the Abacus Trust, Abacus Income Trust, Abacus Group Holdings Limited and Abacus Group Projects Limited. The responsible entity of the Abacus Trust and Abacus Income Trust is Abacus Funds Management Limited. Unless specified otherwise, the following information is current as at 24 August 2010.. Number of holders of ordinary fully paid stapled securities Voting rights attached to ordinary fully paid stapled securities Number of holders holding less than a marketable parcel of ordinary fully paid stapled securities Secretary, Abacus Funds Management Limited Secretary, Abacus Group Holdings Limited Secretary, Abacus Group Projects Limited Registered office Abacus Funds Management Limited Abacus Group Holdings Limited Abacus Group Projects Limited Registry Other stock exchanges on which Abacus Property Group securities are quoted Number and class of restricted securities or securities subject to voluntary escrow that are on issue There is no current on-market buy-back SUBSTANTIAL SECURITYHOLDER NOTIFICATIONS Securityholders Calculator Australia Pty Limited Perpetual Limited one vote per stapled security 12,732 646 Ellis Varejes Level 34, Australia Square 264-278 George Street Sydney NSW 2000 (02) 9253 8600 Registries Limited Level 7, 207 Kent Street Sydney NSW 2000 (02) 9290 9600 None None Number of Securities 620,300,523 127,834,350 111 ASX additional information SECURITIES REGISTER NUMBER OF SECURITIES 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 – over TOP 20 LARGEST SECURITYHOLDINGS SECURITYHOLDERS 1 Calculator Australia Pty Limited 2 J P Morgan Nominees Australia Limited 3 HSBC Custody Nominees (Australia) Limited 4 National Nominees Limited 5 RBC Dexia Investor Services Australia Nominees Pty Limited 6 J P Morgan Nominees Australia Limited 7 RBC Dexia Investor Services Australia Nominees Pty Limited 8 Cogent Nominees Pty Limited 9 Citicorp Nominees Pty Limited 10 RBC Dexia Investor Services Australia Nominees Pty Limited 11 Citicorp Nominees Pty Limited 12 Australian Executor Trustees Limited 13 Anz Nominees Limited 14 Avanteos Investments Limited 15 RBC Dexia Investor Services Australia Nominees Pty Limited 16 Kalambay Limited 17 Suncorp Custodian Services Pty Limited 18 Bond Street Custodians Limited 19 Investec Bank (Australia) Limited 20 Equity Trustees Limited NUMBER OF SECURITYHOLDERS 557 1,421 1,756 8,192 806 NUMBER OF SECURITY % OF ISSUED SECURITIES 620,300,523 143,720,104 109,883,306 91,796,743 78,307,069 52,390,874 41,642,429 27,903,000 23,773,848 17,227,319 16,294,158 15,148,533 13,417,092 12,611,452 11,482,247 11,347,509 9,181,769 8,496,573 7,420,035 7,219,663 33.494 7.760 5.933 4.957 4.228 2.829 2.249 1.507 1.284 0.930 0.880 0.818 0.724 0.681 0.620 0.613 0.496 0.459 0.401 0.390 112 112 ABACUS PROPERTY GROUP GLOSSARY At 30 June 2010, the Abacus Property Group (APG) comprised the Abacus Trust (AT), the Abacus Income Trust (AIT), Abacus Group Holdings Limited (AGHL) and Abacus Group Projects Limited (AGPL). A summary of the corporate structure is illustrated below. AGHL has been identified as the parent entity for the purpose of producing a consolidated financial report for the APG. That is, The concise financial report of AGHL services as a summary of the financial performance and position of APG as a whole. It consolidates the financial reports of AGHL, AT, AIT and AGPL and their controlled entities. Abacus Abacus Funds Management Limited, the responsible entity of the trusts AGHL Abacus Group Holdings Limited AGPL Abacus Group Projects Limited AIT APG AT Abacus Income Trust Abacus Property Group Abacus Trust ABACUS PROPERTY GROUP Level 34 Australia Square 264-278 George Street Sydney NSW 2000 T +61 2 9253 8600 F +61 2 9253 8616 E enquiries@abacusproperty.com.au www.abacusproperty.com.au Abacus Group Holdings Limited Abacus Trust Abacus Income Trust Abacus Group Projects Limited annual financial report 2010 a b a c u s p r o p e r t y g r o u p a n n u a l fi n a n c a i l www.abacusproperty.com.au r e p o r t 2 0 1 0 

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